There are risks to American homeowners who are house-rich
“According to the National Association of Realtors, the median price of a house in the United States is worth $190,000 more than it was a decade ago.” So begins a recent blog post by Ben Carson on the website A Wealth of Common Sense. What’s not noted is that median home prices remain 25-45% above their pre-pandemic levels in numerous housing markets.
Just how much-unrealized gains held in home equity did American homeowners accumulate? Actually, all income groups did quite well, according to this chart from the National Association of Realtors. If you’ve noticed the lower wealth gains for homeowners who’ve owned their homes for 15 years or more, keep in mind the massive decline in home prices from 2008-2011, which would erode gains in the first four years.
Why is housing wealth so important? As we know, for most Americans, their home represents
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their largest financial asset. Columnist Ben Carson explains why. “The housing market is more important for the middle class than the stock market because ownership of residential real estate is more widespread. The top 10% controls nearly 90% of the stock market while the bottom 90% owns more than 55% of the housing market”. That’s quite a concentration of wealth in our equities market. However, housing appears to be our nation’s more democratized source of wealth. Before we go further, please don’t forget I’m not a financial advisor but a reverse mortgage industry commentator who’s passionate about the appropriate use of reverse mortgages to unlock housing wealth. If you would do me a favor and hit the like button- it tremendously helps our ranking in the YouTube algorithm.
While the middle class has successfully embraced homeownership and subsequently accumulated significant equity in their home, there are a few challenges and risks.
First, concentrated housing wealth leaves homeowners exposed to considerable losses. For example, the other 80% in this chart from Fortune represents your typical middle-class household where wealth is highly concentrated in their home or real estate. Why is there such a difference between where the wealthy and middle class invest? One reason may be that most Americans are typically not prone to putting aside substantial savings or investments. However, a mortgage on the home is somewhat of a forced savings plan in hopes that the investment will yield substantial returns. Consequently, this concentration of wealth leaves much of the middle class at tremendous risk of housing market fluctuations or resets.
Second, is home equity is neither liquid nor secure. History has taught us that a run-up of home appreciation can easily be erased in a few short years and may take up to a decade to recover. For example, in Las Vegas, it took 15 years for home values to recover to their 2006 high-water mark! For most markets, it wasn’t until 2019 that home prices rebounded back to their pre-2008 values. And don’t forget to factor in inflation.
Third, as an investment, home ownership involves ongoing costs. Carson writes, “For one thing, the wealth gains cited in the research by the NAR are on a gross basis. You have to net out all of the ancillary costs involved with homeownership to get the real number. Things like realtor fees, closing costs, property taxes, moving expenses, insurance, upkeep, and maintenance can take a huge bite out of any nominal price increases”.
So what options do homeowners have to convert an illiquid asset such as a home into readily available cash? Getting a home equity line of credit or HELOC is one option, but the credit line could be frozen or closed, and monthly payments are required.
You could sell the home and buy another, but at today’s interest rates, who wants to abandon a lower mortgage rate only to jump into a higher rate and payment? The only exception to this would be if one moves from a high-cost to a low-cost area.
Another option is to sell and then rent. While this may allow one to secure their equity at today’s prices, it forgoes the opportunity to accumulate home equity.
But what if you don’t want to pack up and sell or get a HELOC that could be frozen? There’s actually one option that could secure a portion of one’s home equity based on today’s prices instead of waiting until home values have fallen that doesn’t entail required monthly mortgage payments or selling. In such instances, this is where a reverse mortgage could provide unsurpassed flexibility. Yes, there’s a problem with being house-rich if you have no desirable way to separate the equity that doesn’t incur risk. However, being house-rich and knowing what options are available can empower homeowners to take action at a time that best meets their interests and goals.
Resources:
[A Wealth of Common Sense] The Problem With Being House Rich
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(An important ongoing cost that was not covered particularly for seniors are HOA dues and fees. The growth in this cost area particularly for seniors has been explosive especially since HOA costs were relatively concentrated to places such as NYC and specific living situations, like condos and coops, until a few decades ago.)
But basically a fundamental question still looms. Why are first time borrowers staying away from reverse mortgages, particularly HECMs? By the number of HECM endorsements in this fiscal year and last, it would appear that liquidity on homes will not be as problematic for new retirees as we, as an industry, say; yet independent (i.e. of this industry) study after independent study have indicated that seniors are entering retirement with less retirement resources and more debt than the generation that went through the Great Depression and World War II.
The lack of correlation as to the need for more liquidity in retirement is seen in even one of our best years for HECM endorsements in a decade, last fiscal year. There were 28,700 HECM Refi endorsements and about 35,700 first time HECM borrower endorsements of the approximately 64,400 total HECM endorsements last fiscal year. This fiscal year there will be approximately 29,000 first time HECM borrower endorsements compared to around just 4,000 HECM Refi endorsements for total HECM endorsements of about 33,000. That represents a drop of about 6,700 first time HECM borrower endorsements which is about a 10.4% of the total HECM endorsements for last fiscal year while the drop in HECM Refi borrowers will be about 24,700 or about 38.4% of the total HECM endorsements for last fiscal year. The drop in total HECM endorsements should be about 31,400 or a percentage loss in total HECM endorsements compared to last fiscal year of 48.8%. So while higher expected rates have been particularly hard on HECM Refi endorsements, that was not as true for HECM first time borrower endorsements. The percentage loss in HECM Refi endorsements will be 86.1% when compared to last fiscal year’s total HECM Refi endorsements, while the loss percentage in HECM first time borrower endorsements will be about 18.8%.
With the basic problem of seniors entering into retirement with less retirement assets and more debt, it is not surprising that the higher expected rates were less impactful on HECM first time borrower endorsements than on HECM Refi endorsements; however, the question remains why is the HECM first time borrower endorsement level so low for both last fiscal year and this. Perhaps all of the consumer protections added to HECMs since the end of fiscal year 2013 have helped lower HECM endorsement production. With all of the excellent consumer protections added at the end of fiscal year 2013 and during fiscal 2014, why was a rather harsh financial assessment needed and why were the drops in PLFs and the expected rate floor in determining PLFs necessary on 10/2/2017? The HECM portion of the MMIF seems bloated when compared to the reserve mandated by law. Can some of that be used to allow for higher PLFs and an increase in the expected rate floor in determining PLFs in the future? With it now being the middle of September, the last month in this fiscal year, it seems the answer will have to wait for at least another fiscal year.