Housing Bubble's Pop Could Doom Boomers

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.

"[Families] would have no simple way to distinguish bubble-generated wealth, which would prove ephemeral, from real wealth, which could be expected to endure," says the report. "As a result, tens of millions of families likely ended up saving less than they would have considered prudent, had they recognized that their wealth was temporarily inflated."

Since the peak of the housing market in mid-2006, more than $4 trillion worth of housing wealth -- or over $50,000 per family -- has evaporated. Real home prices are still dropping at a rate of about 2%, or $350 billion, per month.

This bursting bubble promises to be much worse than the recession caused by the stock-market decline at the start of the decade, according to Baker, simply because homeownership is much more common than stock ownership, even when factoring in 401(k)s and mutual funds.

This economic cycle is "likely to be a much worse downturn than what we saw in '01 and '02," Baker adds.

The rate of homeownership increases with age, and Baker believes that proposals to cut Social Security benefits for near-retirees or current retirees will not come to pass simply because those consumers will have nowhere else to turn for financial support. Those who are looking to retire from 2025 onward have more room to strengthen their finances and adjust expectations for government aid.