We’ve heard plenty of warnings about the housing bubble. Less discussed is the “debt bubble” which largely grew from the wealth effect that many homeowners felt as the values of their homes steadily rose over the last several years.

According to a Wall Street Journal article (March 8, 2006), the value of household real estate climbed 71% in the last five years. But during the same period, mortgage debt grew even faster, increasing 75% as households cashed out part of their home’s equity through home equity loans, HELOCs, and cashout refinancings.

At the same time, car loans and credit-card balances are also rising. Outstanding consumer debt is up 27% over the past five years, well ahead of the 13% cumulative inflation rate.

This doesn’t bode well for the Baby Boom generation just embarking on retirement. Home equity has long been the largest component of household wealth and the foundation of retirement security. While “house rich, cash poor” seniors who desire to “age in place” certainly have their problems, they also have options - sell and downsize, reverse mortage, etc.

But a generation of retirees that’s not even “house rich” - due to falling values, growing debt burdens or, both - won’t have these options. And as traditional pension programs fall by the wayside, more reliance will be placed on home equity for retirement financing.

An excellent new book, Retire on the House even promises that home equity may be the solution even if you haven’t done the “right things” in preparing for retirement:

“You can retire well on the equity in your home. This book will show you how.

Forgot to fund the 401k or individual retirement accounts (IRAs)? No problem. As long as you bought a house that appreciated substantially in value, you can look forward to a prosperous retirement.”

All well and good, but counting on housing market growth alone to generate equity isn’t wise. Perhaps Americans to save for retirement by paying down their HELOCs and other mortgage debt.