Americans have long held onto home equity, for many seeing the payoff of the 30-year mortgage as an important life milestone, and in turn, being unwilling to let go. Until now.
Whether the economic downturn has rebalanced Americans’ perspectives on homeownership or home equity is simply the last thing left for people coming of retirement age today, preferences toward the use of home equity are changing, according to an annual survey conducted by Ameriprise Financial.
Today, 47% of those approaching retirement age said they expect to use home equity to help fund retirement. The figure is up from 39% who said the same thing five years ago, pre-recession.
The cause behind the shift may be due to the trauma experienced by households after having lost substantial value in their investments, Ameriprise speculates, or it could be they have no other place to turn. In any case, home equity tools can—and will—become more commonplace and more necessary in the years to come, retirement experts and researchers say.
“Households typically age in place and only sell the house when a shock comes along,” says Dr. Tony Webb, research economist at the Center for Retirement Research at Boston College.
Yet pointing to the relatively small number of households that utilize reverse mortgages, Webb says, the proportion has to change in response to retirement factors that are also shifting from one generation to the next.
“Although it may not seem like it, we’re in a golden age of retirement,” Webb says. “Households that are currently retired often have pensions, and there are still a decent number with retiree health insurance. But at least in the private sector, pensions are going away.”
Combine a shift away from employer-paid retirement benefits with the meager savings most households have amassed—the median being around $120,000, according to the Boston College Center for Retirement Research—and the house becomes the next thing in line to fund retirement much more quickly than in past generations.
“Given the final salary pensions going away and Social Security age going up; given health care costs increasing, households are in a bind,” Webb says. “The one asset almost all retirees hold is the house.”
Relatively speaking, even in the hard-hit areas of the country where homeowners saw property values plummet, the house still may look better than the other investments in a household’s portfolio, says Tucker Watkins, private wealth advisor with Ameriprise.
“People aren’t getting the interest they were used to. [Using home equity] has become more more favorable for a lot of reasons,” he says.
Pointing to an extension of loan limits above $600,000, as well as the introduction of the lower-cost Saver reverse mortgage, the picture has improved for those interested in tapping into home equity, he says.
“The costs are lower and the security is higher,” Watkins says. “It makes the reverse mortgage more attractive.”
The experts agree, there’s no question people are going to need more ways to tap into home equity. Yet the want to do so is another question.
Many have historically been hesitant take out a reverse mortgage for reasons that may not make rational sense, Webb says.
“There may be psychological barriers. They’ve spent their whole life paying off the mortgage. That’s a psychological explanation, not a rational one,” Webb says.
There’s also the consideration of how much wealth families have versus the amount of health they will have and forming a realistic expectation of the costs it will involve.
“Americans experience a disconnect between emotion and reality,” says Watkins.
Yet the sentimental aspect actually will help people to remain in their homes, boosting the instance of reverse mortgage loans in the future, Webb says.
“It’s easy to understand why households age in place. There’s sentimental value there, and family connections. If a household is intending to carry on living in the house, then why not tap equity?”
The future of the products only looks brighter as home values begin to rebound and a wider acceptance of home equity use continues.
“We’re very very far from being there yet but given the pressures on retirees, more and more will take advantage of these products,” Webb says. Further improving the picture are the recent signs of the housing market beginning to thaw. Year-over-year, Standard & Poors found prices were up nationally at a level of 7% in 2012 with a slighter gain predicted in 2013, but still a gain.
“Now we are seeing across the country prices firming up and going up, improving equity,” Watkins says. “The other thing appealing to seniors is they know if they get a reverse mortgage and the home value rises, they are less worried about leaving a legacy to their heirs.”
This edition of the RMD Report is sponsored by national appraisal management company Landmark Network.
Written by Elizabeth Ecker