How to turn inflation on its head
When it comes to inflation the American public is getting a harsh street-level lesson served up like a one-two punch. There’s a dirty little secret about inflation. It doesn’t harm everyone equally and some actually benefit from it.
Monetary inflation and low-interest rates have helped boost asset prices, more specifically home values. As it’s said, those with the gold make the rules. It can also be said, those with the gold stand to make more. These would be large corporations, hedge funds, and investment banks who know how to tap into cheap money and then purchase assets that will inflate in value.
One group of Americans who stand to benefit are older homeowners.
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The National Reverse Mortgage Lenders Association’s Risk Span Index reports homeowners 62 and older are holding over $10.6 in home equity. That’s 35% higher than the estimated $7.05 trillion dollars in held equity announced in March 2019.
Certainly, trillions of dollars have been pumped into the pockets of Americans since the beginning of the Covid-19 pandemic. However, while home values surged and mortgage rates plunged to historic lows the infusion of cash into the economy has led to too many dollars chasing too few goods- or what economists call demand-pull inflation.
Yet, there’s another driver of higher consumer prices, supply-chain shortages. Aside from your living room entertainment center that’s been floating off the coast of Long Beach California for weeks, there’s one supply chain issue that may moderate any substantial reductions in home values as buyer demand collapses due to rapidly rising mortgage rates.
Chief among those supply shortages are single-family homes. Late last year a Realtor-com study found the U.S. housing inventory is short 5.24 million homes. This problem is not novel to us. For decades single-family home construction has languished, a problem which most recently has been magnified by labor and supply shortages.
Younger workers may count on wage increases to offset inflation but history has proven even wage increases never keep pace with the cost of goods and services. Older homeowners in their non-working years have inflation shelters. Even most Social Security benefit-cost of living increases are completely erased by increased Medicare insurance premiums and price inflation.
Despite this, many older middle-class American homeowners could turn inflation on its head converting it from a disadvantage to a bonafide financial benefit. And that feat can be accomplished with a reverse mortgage that secures one’s current high home value and converts a monthly payment into a cash flow booster either by eliminating required monthly mortgage payments or taking periodic or monthly cash withdrawals.
Inflation is undeniably nasty but it hold’s a silver lining for those holding onto hard assets that have inflated in value.
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2 Comments
While home price deflation could become a reality in large sections of California, it is unlikely to spread in any material way (over 10% loss in home values) along the coast except in the case of another mortgage bust or similar financial calamity or “panic.”
To estimate net proceeds from a sale, one must reduce such home equity calculations by unrecoverable fix up costs and selling expenses which are generally on home sales prices and not home equity. This could result in the estimated net sales proceeds being a few trillion lower. Then reduce the net proceeds by anticipated income taxes for homes sold in the lifetime of the seniors net cash flow from these homes could be in the range of just 7 trillion.
Yet to understand the potential for reverse mortgages, it is not just home equity estimates that are needed but also one of the two variables, total home values or total debt. Hopefully, that will be provided along with estimated home equity in the future
Agreed- understanding the impact of aggregate home values and housing debt is key.