Housing Bubble's Pop Could Doom Boomers

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The collapse of the housing bubble will likely wipe away most -- if not all -- of the wealth families have accumulated over the last two decades, according to a new report from the Center for Economic and Policy Research.

While younger households stand to lose more, the economic-policy group found that Baby Boomers approaching retirement will feel worse effects, since they have less time to accumulate additional wealth or change spending and savings patterns. As a result, tens of millions of Americans may be almost entirely dependent on Social Security and Medicare in their golden years.

The group projects that most families' wealth will drop to 1989 levels, if not lower. Even if home prices stay flat through 2009, the median household headed by someone between the ages of 45 and 54 will have 25% less wealth than their counterparts five years ago. If prices fall 10%, those households will have 35% less wealth.

"This extraordinary destruction of wealth will have tremendous implications for millions of families," says CEPR economist and co-founder Dean Baker. "Coupled with a very low personal savings rate, this means that many people, especially those near retirement, will only have Social Security and Medicare to rely on once they leave the work force."

Americans saved about 8% of disposable income during the four decades before the 1990s. The rate started to plummet as consumers expected a continued stream of wealth from stock investments toward the end of that decade. At the same time, Americans were also facing stagnant wages while taking on more credit-card debt.

Once the stock bubble dissipated, home values soon began to climb, based on expectations that wealth from yet another non-cash asset would support certain lifestyles and behaviors.