Retirees’ Housing Wealth Substantial For Reverse Mortgages

Many retirees will be able to tap their home equity for income, according to data from the 2013 Federal Reserve’s Survey of Consumer Finances.

In 2013, 77% of households in their early 60s owned a house, and the median house price was $185,000, data show.

“But 63% of households in their early 60s continued to have a mortgage,” writes Alicia H. Munnell in a recent MarketWatch article. “Subtracting outstanding mortgage balances from the gross house price yields median home equity of $110,000, which accounts for more than 40% of the homeowners’ total wealth as conventionally measured.”

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The importance of home equity over most of the income distribution shows that it could provide an “important source of income in retirement,” she says, noting that one key way to tap that equity is through a reverse mortgage. 

A reverse mortgage offers a way for those 62 and older to stay in their home, she explains, adding that people with a conventional mortgage can qualify for a reverse mortgage as well. However, they must use those funds from the reverse to first pay off their mortgage.

“Eliminating mortgage payments substantially reduces the demands on their monthly income,” she says. “But the increase in households 60-65 with a mortgage on their home – from 53% in 1989 to 64% today – is a concerning trend.”

Munnell is the director of the Center for Retirement Research at Boston College.

Read the MarketWatch article here.

Written by Cassandra Dowell

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  • There is a question all of us should be asking at this point in the industry. What will drive up HECM demand? As discussed later we need an industry wide study identifying the key factors needed to have significant HECM growth.

    Some claim that it is not until Baby Boomers have sufficent equity will we see significant growth in fiscal year endorsement numbers. Dr. Munnell points out that we are already there and based on the stats she uses, there is little doubt that we have been there for months if not a couple of years.

    Based on her stats, Dr. Munnell makes it clear that the home equity of the average senior in her/his 60s is over 59%. So one has to question the significance of that benchmark as a driving factor in seeing HECM demand rise anything close to what it was even in 2006. In fact no one is saying it is likely we reach a total of 100,000 HECM endorsements before fiscal 2017, if then.

    We have also been hearing that as more Baby Boomers become 62, demand will rise dramatically. Yet that phenomenon has not been observed since Baby Boomers first began turning 62 on January 1, 2008. In fact the only dramatic turns since Baby Boomers have turned 62 is a general overall downward one.

    As an original supporter of the Extreme Summit movement, it is time to question our ideas about how to turn around demand for HECMs. It is now time to ask why there have been no industry studies on what are the key factors needed to see endorsements rise dramatically. We have new doors open to us but none of those doors show the promise of growth near term of that experienced in fiscal 2007.

    We need an industry wide study on what will drive HECM endorsements. The time to do that is NOW.

    (The opinions expressed in this comment are not necessarily those of RMS or its affiliates.)

  • While I respect Dr. Munell, I have never been a fan of the Boston College Center for Retirement Research. Much of the work from that organization shows little pride in authorship, reflects little significant independent research, and displays no real editorial work.

    The article by Dr. Munnell was so full of flaws it was difficult to follow at times. Even one of commentors who used the name, David Ryan, wrote: ” Conversion of an asset to cash is not income;” although in rare instances, it can be. In the cases used by Dr. Munnell, David is right.

    Dr. Munnell writes: “The importance of home equity over most of the income distribution shows that it could provide an important source of income in retirement. This income can be accessed by moving to a smaller house, which both substantially reduces property taxes and other expenses and provides a pile of assets that can generate returns.”

    There is so much wrong in the quoted paragraph where does one start? Equity and income distribution are two different things. There was no income distribution presented that allows for the conclusion made in the first sentence.

    How in the world can income be accessed by moving to a small home? What can be accessed per the chart just above the paragraph is equity if the home is sold but this conclusion is reached with no consideration for selling and fix up costs. Where does income come into the picture? When a home is sold the first thing a seller receives is a recovery of the investment and to the extent that the cash proceeds received exceed the full recovery of the investment, GAIN, not income.

    Then there is the nonsense about downsizing reducing property taxes. My father pays less than $400 per year under California Proposition 13 on a house worth over $500,000. His neighbors on both sides of his house pay less. If any of them downsized into a situation where they lost their Proposition 13 protection, their property taxes would rise multiple times what they are paying now.

    While it is great that Dr. Munnell is on our side, some of us need to help her when she writes on the value of reverse mortgages.

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