Internet Explorer 11 is not supported

For optimal browsing, we recommend Chrome, Firefox or Safari browsers.

Homeownership’s Hidden Debt

First-time buyers aren’t just acquiring property. They’re taking on a jurisdiction’s financial liabilities.

Cash money in the grass.
It’s no secret that younger Americans are not buying homes in the numbers previous generations did. These days, only 35 percent of households headed by people under the age of 35 own their houses or apartments, compared to 40 percent just 20 years ago. It’s easy (and valid)  to say that younger people are put off by their lack of accumulated wealth. But even if the under-40s were flush with cash, they would have another good reason to avoid buying property in some of the country’s most densely populated areas: They also would be purchasing decades’ worth of pension and other long-term liabilities related to government workers.

Millennials face obvious financial hurdles in making six-figure purchases. They are less wealthy than their baby-boomer counterparts were at the same age. According to the Pew Research Center, millennials’ median net household worth in 2016 was $12,500 -- 40 percent less, in inflation-adjusted dollars, than the $20,700 that represented boomers’ wealth in the early 1980s.

But even if millennials had ample earnings to save and invest, they still would have to pause before making investments in the nation’s highest-valued property markets.Consider the broadly defined New York City area, including Connecticut and New Jersey. According to Zillow, the median listing price for a home in Connecticut as of this May was $329,900. In New Jersey, it was $339,000. In Westchester County, N.Y., a popular bedroom community just north of New York City, it was $699,000.

Those are serious investments, even if the purchase price were the only cost of homeownership. But in buying a house and the land it sits on, the purchaser is also taking on a share of the jurisdiction’s future liabilities.

Let’s consider Connecticut first. Ranked by household income, it’s the fifth-richest state. Yet Connecticut’s wealth has not helped it come close to adequately funding its future liability for public-employee pensions. Connecticut owes $37.5 billion on that score, plus another $22 billion for public-sector retiree health care. That works out to $42,500 for each of the state’s 1.4 million households. That’s not money for future investments that return value, such as infrastructure; it’s money that should have been collected from past taxpayers. Instead, the debt has been pushed to the future. It should by rights be deducted from today’s home values.

New Jersey’s households are looking at an even bigger bill for that state’s unfunded public-sector retirement liabilities: $52,500. And it’s by no means an East Coast-only phenomenon: Californians are on the hook for $19,100 per household. Unfunded retirement obligations exist across much of the country; Pew estimates that state governments alone owe $2.1 trillion, an average of $17,300 per household.

Would-be property owners should consider that state and local governments could levy a combination of higher property, income and sales taxes sufficient to attempt to make good on these obligations. But renters subject to crushing income and sales taxes could simply move away -- leaving property owners with the bill, or with lower property values reflecting the clearer understanding of that liability.

Alternatively, states and localities could begin to pare back current spending to fund these obligations, or in extreme cases even begin to default on them. That would precipitate far inferior government services, such as education and health care, and infrastructure, such as transit and roads. And it would likely produce public-employee unrest in the form of protests and lawsuits against benefit cuts.

In any event, it’s hard to blame millennials from holding back on purchasing property. After all, they would not just be buying saleable, appreciating assets, as the baby boomers once did. Rather, they’d be buying the massive liabilities that the boomers are leaving behind. 

An analyst and writer on urban issues
Special Projects