More Americans turn to home equity for retirement funding

Axios outlines how home is increasingly being used as an asset for retirement funding, but some states are seeing equity levels decline

Americans are increasingly turning to home equity for funding their retirement plans — especially through relocation and downsizing — after the pandemic led to a large uptick in home equity levels, according to data from Vanguard Group and reporting by Axios.

“People still need a place to live in retirement and rarely take advantage of reverse mortgages to get money out of their homes,” the Axios article states. “Moving somewhere cheaper, however, is much more common.”

Kevin Khang, a co-authors of the Vanguard report, said that in Colorado, the average difference in value between a house being sold and the house being bought in a relocation — expressed as a percentage of the purchased home’s value — has increased from about 12% in 2007 to 73% in 2019.

“Given what happened to housing values in Colorado during the pandemic, it’s very likely that this number is even higher now,” Khang told Axios.

Other states with outsized potential include California at 77% and Hawaii at 116%.

However, some states are starting to see declines in home equity levels, as home prices, which grew considerably during the pandemic, are being impacted by inventory issues and higher rates, which are driving demand down.

The states of Idaho and Washington rank first and second, respectively, among regions hit hardest by rising rates and a cooling home sale market, according to a recent report from CoreLogic. Homeowners nationwide saw an average equity increase of 7.4%, however.

“[W]ith 66,000 borrowers entering negative equity in the fourth quarter, the total number of underwater properties is now approaching levels seen at the end of 2021, which was the lowest since the Great Recession,” Selma Hepp, chief economist for CoreLogic, said in the report. “The new hot spots for equity declines are largely markets that have seen the most significant home price deceleration, including Boise, Id.; the San Francisco Bay Area; cities in Utah; Phoenix and Austin, Tex.”

Seniors in particular have seen significant gains in home equity over the past few years, with collective senior-held home equity at an estimated $11.81 trillion as of Q3 2022, according to the Reverse Mortgage Market Index, which is released quarterly by the National Reverse Mortgage Lenders Association and data analytics firm RiskSpan.

However, growth for this cohort has been softer in recent months when compared to 2021 and early 2022, as evidenced by the previous quarterly RMMI growth levels.

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