The economic forces that will shape HECM lending in 2024

There’s one conversation that every financial advisor should have with their clients. A conversation that should also be explored by reverse mortgage professionals with every potential borrower. Inflation. Questions such as “How are you coping with the higher price of everyday goods and services you’re paying today?” can reveal a cashflow crunch that needs to be addressed. 

Inflation is no secret but the headlines are often quite misleading or incomplete if we’re generous. Yeah! The consumer price index for January only increased 3.1% higher than one year ago! Is this a reason to celebrate? Not necessarily. Welcome to the wretched inflation ratchet- note not ‘racket’ although some may beg to differ.

When it comes to inflation the Federal Reserve’s mandate is to keep the annualized rate at two percent or lower. This works well in a modestly-expanding economy as long as wages and retirement benefits increase by roughly the same amount. A lower annual rate of inflation makes it more likely higher wages will offset the difference in the consumer’s purchasing power. 

However, after two years of inflation well above the Fed’s target and generally far beyond any American wage increases the pain is felt. Many are beginning to ask if inflation is only 3.1% why don’t they feel the ‘improvement’?

The answer lies in the dirty little secret about inflation few financial pundits openly discuss. 

Welcome to the Ratchet.

The secret is while the annual rate of inflation has dropped considerably from its high of 9.1% in June of 2022, the cost of most goods and services remains well above their pre-pandemic levels. Like a ratchet prices are typically locked in only advancing in one direction. How fast that ratchet is turned is our annual rate of inflation. Gains in the annualized rate of inflation are often locked in’ with higher prices becoming the new norm. The future growth of inflation is added to the existing inflated cost of goods and services. Ouch!

While the rate at which the ratchet advances may have slowed the higher prices of 2021-2023 become the new baseline for American consumers. This has carved out a large part of middle-class wealth and decimated retirees’ cash flow Unfortunately, most consumers find themselves attached to 2021 wages with 2024 prices eating away at their pocketbook. 

For example, on average Americans are paying 25% more for their groceries. The price of eggs has fallen from its high of $4.82 a dozen in January 2023 but remains 71% higher than they were just three years ago. The price for a pound of bread is 25% higher than it was in January 2021. 

But there’s another kind of inflation- the problematic and widespread increases in homeowners insurance premiums hitting homeowners across the nation. Compounding this are property tax increases much in part due to the massive runup in home prices during and following the pandemic. For example, property taxes in Jackson County, Missouri jumped by 32% according to KCTV 5. In Florida. And some municipalities, such as Brunswick Maine, were considering that property tax assessment rates be increased to 70 – 110% of the home’s market value in accordance with state law. 

The good news is that unlike inflation property taxes can and do fall when home values decline. Assessment rates, not so much.

Today, despite the problematic effects of inflation, many financial pundits are touting the positive GDP numbers released earlier this month. While true, the GDP or Gross Domestic Product reveals strong economic output but prices remain stubbornly higher than they were just two or three years ago. So is deflation the answer? Will your $7 latte ever go back to its 2019 $5 price? The answer to both is no.

While falling prices or deflation sounds like an attractive proposition it actually can wreak havoc on an economy. Falling prices can lead to a spike in unemployment and postpone consumer purchases which fuel our economic output. Why buy that new washing machine when it will be cheaper in a few months? The Federal Reserve prefers modest price increases or inflation averaging an annualized rate of two percent.

What about Social Security recipients? Despite Social Security benefits being increased thanks to the Cost of Living Adjustments of 5.9, 8.7, and 3.2% in the years 2021-2023 respectively, the aggregate increase of 17.8% while helpful doesn’t fully offset the increased cost of auto, home, or health insurance. And should they need to purchase a car Kelly Blue Book reports the average auto transaction will cost $6,500 more than it did in 2021. 

Inflation is not a selling point. It’s a reality. A harsh reality that can lead retirees to prematurely exhaust their retirement savings with larger withdrawals. For others a reality that reduces their standard of living. 

With this in mind, the effects of inflation should be part of every conversation related to retirement planning or the consideration of a reverse mortgage.