by Brian Brady
Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL
The housing market is “stuck”. Higher mortgage rates and the fear of higher property taxes cause Boomers and Millennials to “hunker down” rather than move to new homes. Reverse mortgages might offer a solution to this problem. Today, 2 out of 3 Baby Boomers are rejecting retirement communities and “aging in place”:
Today, 66% of this population report that they plan to age in place. Little changed from 2016, when 63% said the same. Given their reported financial gains in the past five years, however, they may be more equipped to do so.
When asked when they expect to move next, 27% feel confident they would move again, while 36% believe they will not move and 37% simply don’t know. These data suggest this population is in no rush to leave their current homes.
Regardless of their plans to move or age in place, 66% of survey respondents say they expect their home to need some degree of renovations to make the space livable for the long term if they were to age in place. Between personal savings and longer-term retirement and investment accounts, those who think they would need renovations to age in place say they are confident they could afford them.
This is both a problem and opportunity for real estate agents and brokers. Boomers own many of the “move-up” homes their children covet but can’t afford. Millennials might love to sell their $500,000 homes, and trade up to a $700,000 home but are locked in to sub 3% mortgage rates in a 5.5% mortgage rate environment. Let me break down the sticker shock the millennials are facing:
Millennial family buys a home for $350K, in 2016, with a 4.75% FHA mortgage rate and a monthly PITI of $2400. In 2021, they refinanced that mortgage to a 2.75% conventional loan with a monthly PITI of $1700, retaining over $200K in equity (which could be used for a down payment on a $700,000 home. There are two problems today: that $700,000 home is now $800,000 and mortgage rates are at 5.5%. If they sold their smaller homes, used their home equity as a down payment, the “trade-up” home would have a mortgage payment of $4400 rather than the $3000/mo it would have cost, when they conceived the plan a year ago. The higher price and mortgage rate added over $1400 in payment shock.
This is going to be an ongoing problem unless the Boomers start downsizing. What can agents do to list and sell these “move up homes”? Reverse mortgages might be a solution for those 2 out of 3 Boomers. Essentially, Boomers can “cash in” their equity on the bigger home (assuming it’s paid off), plunk $250,00 down on a $500,000 retirement home with a $250,000 reverse mortgage, and add some $500,000 to their investment accounts. The Boomers won’t be required to make a mortgage payment, as long as they live in the retirement home and add liquidity to their net worth.
This is a simplistic illustration of how a reverse mortgage works. Whenever we speak to mature Americans about the reverse mortgage solution, we either ask them to read the book “Understanding Reverse” and/or buy it for them before scheduling a Zoom meeting. Reverse mortgages are a much maligned and often misunderstood mortgage product which requires deliberation, research, and a competent mortgage loan consultant to introduce, explain, originate, process, and fund the loan.
John says:
They are WAY too complicated for the average person to ever take seriously. I read this five times and I still don’t understand what you are suggesting they do. Reverse mortgages have been pushed on TV by slimy old washed-up actors and athletes to a point where most look at them as scam products. Most average retired people are barely surviving and worried about their health and future to get involved in something like this.
July 20, 2022 — 3:50 am