Reverse

Feature: The Comeback

Written by Lauren Daniels, as originally published in The Reverse Review.

One thing is for certain over the past several years: The U.S. housing market has been a roller coaster ride. Reverse mortgage professionals have been along for the trip, experiencing both the highs and lows. The breakneck pace of rising demand and home prices that marked the early aughts collapsed in the middle of the decade, decimating home values and deepening the recession. Recovery has been slow-going. But recent indicators are positive. Home prices have seen several months of upward gains and new-home sales and housing starts are improving—great news for both seniors and the reverse mortgage industry.

Slow and Steady

While the exact beginning of the boom years is debated, the far-reaching fallout of the collapse is irrefutable. In just a few years—from roughly 2005 to 2009—more than a decade’s worth of housing market growth evaporated. Prior to this point, residential construction had enjoyed 14 years of growth. Housing demand kept pace, more than doubling from 1991 to 2005. Home prices, as measured by the Case-Shiller real price index, also jumped from 1996 to 2006, with the majority of that growth (67.5 percent) occurring between 2002 and 2006 before tumbling. The rise and rapid fall of home prices is unprecedented in America’s history. The reverse product took a double hit as home values sank and PLF limits decreased. The recovery from those losses has not been as swift. The market has been making its climb toward stability, in fits and starts, for more than five years.

For the 12 months ending June 2014, home prices across the nation increased 8.1 percent, according to the S&P/Case-Schiller Home Price Index. While posting a smaller gain than expected, the increase pushed home values to rates not seen since the spring of 2005, a sign of a stabilizing housing market and a recovery that is here to stay. “All else being equal, more equity should equate to more loans,” says Michael McCully, partner at New View Advisors. “In reality, it is important to analyze state, county and city data to better understand whether home values in areas where HECMs tend to be originated are rising at the same rate as the general United States.” Chicago is an example of a positive recovery both for home values and HECM endorsements: The city saw a 6.6 percent increase in home values year-over-year according to the Case-Shiller index. Chicago also ranks third in the number HECM endorsements to date, an upturn of 4.4 percent from 2013 according to Reverse Market Insight. The increase in home prices translates into usable equity for America’s seniors. The latest report from NRMLA/RiskSpan Reverse Mortgage Market Index (RMMI) found the aggregate value of senior housing increased by $84.1 billion in the final quarter of 2013, resulting in $3.54 trillion dollars of equity.

Debt Crisis

More important than the recovery in the surrounding area, existing mortgage debt may be the deciding factor in seniors’ ability to take advantage of the appreciation in home values. Unlike their parents, who came of age during the Depression and were taught to pay off mortgage debt, baby boomers are more comfortable with debt and will most likely enter retirement with outstanding loans. According to a study by the Federal Reserve, in 2010 (the latest numbers available), almost one-third of retired households had housing debt, with the average retired household owing $61,000—more than triple the amount owed by retirees in 1989. “A compensating fact is that many of the borrowers interested in the HECM product already have a lien against their property; this offsets some of the gains in volume home price appreciation would otherwise generate,” McCully says.

For some, increased home values could be the deciding factor in qualifying for a reverse mortgage. Imagine the following situation: One year ago, a senior is interested in the program, but doesn’t qualify because of the ratio of the forward debt owed to the potential proceeds of the reverse. Over the next 12 months, the home appreciates 8 percent (the national average). It’s possible that the increase in equity, combined with the additional 12mortgage payments, would allow this borrower to now qualify for a HECM loan. “For every 1 percent increase in home values, we should see an increase in the percentage of people qualifying for loans,” adds David Peskin, president of Reverse Mortgage Funding.

Interest rates will also exert pressure on the reverse market. The current bargain-basement rates can’t continue forever, and economists and analysts expect rates to rise as soon as early 2015. Higher interest rates potentially limit proceeds for borrowers. As rates increase, PLFs drop, sometimes sharply. Borrowers who don’t receive sufficient proceeds may be locked out of the option of a reverse mortgage.

Supply and Demand

America’s next housing crisis could be one of quantity, not value. The majority of older Americans want to age in place, yet their homes are not in a condition to allow them to do so. A recent study by the Harvard Joint Center for Retirement Studies and the AARP Foundation found a lack of housing that is “physically accessible, well-located, and coordinated with supports and services” for seniors. The need for accessible features—wider doorways, ramps, specialty handles and faucets, and more—can add up quickly. An August 2014 article from MarketWatch estimated the cost of retrofitting the average home with features that minimize diminished mobility and other age-related issues can easily top $70,000. Adding an in-home elevator can cost up to $20,000; smaller improvements such as ramps average $1,200. The improvements are needed, the Harvard/AARP study notes, only 46 percent of homes owned by seniors 50 or older with difficulties climbing stairs currently have no-step entryways.

There is also a lot of opportunity in HECM for Purchase. Relatively new to the market, using the equity in a senior’s current home toward the next home removes the worry of having the available cash to pay for principal and interest payments. The popularity of H4P will grow as builders and real estate agents see the ability of the program to generate new potential buyers for both existing and new homes. Allowing seniors to consider additional options in terms of price range and homes with accessible features. “The Purchase program gives seniors a house they’ll be excited to spend the rest of their lives in and doesn’t limit them to downsizing,” Peskin says.

 

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