Huntington Beach, Calif. — While reverse mortgage loan volume slid across the U.S. in recent years, California has long been home to the greatest number of reverse mortgage endorsements relative to the other 49 states. Now, based on market factors, there could be reason to project even more volume in the coming years.
This was the message during remarks Tuesday by California Association of Realtors economist Jordan Levine before the National Reverse Mortgage Lenders Association’s Western Meeting in Huntington Beach, Calif.
Housing supply, calculated as the ratio of houses for sale relative to houses sold, is constricted more in California than across the U.S.: The Golden State has around 3.5 months’ supply versus the national average of 5.2 months as of March, according to the Federal Reserve Bank of St. Louis. This factor, combined with economic pressures including rising interest rates and near-full employment, will further reduce housing affordability for new homebuyers, Levine forecasts — and those same factors also lead to current homeowners remaining in their homes.
“The market is going to be flat,” Levine projects. “We don’t see growth in home transactions. It’s a tough market for Realtors, but for [reverse mortgage professionals] this means more and more equity accumulated and people incentivized to stay in their homes—so growing your customer base.”
California, the nation’s most populous state, has always provided a significant chunk of the overall Home Equity Conversion Mortgage total; in 2016, California led all states with 11,069 endorsed loans, dwarfing second-place Florida and its 4,273.
Possible unintended consequences of economic stimulus during a time of historically low unemployment, Levine noted, are rising interest rates and inflation. With interest rates rising, prospective homeowners are less able to afford new home purchases. At the same time, existing homeowners are less motivated to move, due to the prospect of losing out on the low interest rates most have secured in the post-recession housing market.
“Because of lack of construction, longtime homeowners are not moving,” Levine said. “People are locked in at 3.5% interest rates, and there’s no reason to move.”
Further, California’s Proposition 13 law places a limit on real estate tax increases, meaning the property taxes homeowners face are largely based upon purchase price, with a cap on tax increases over time. Under the law, the tax rate is based on the purchase price in the first year of ownership. The taxable value then increases each year by 2% or the rate of inflation, whichever is lower. This presents yet another reason for homeowners to stay and possibly remodel their properties, instead of moving and losing their tax advantage.
According to NAR, the turnover rate of homes in California is 4.2%, and for the first time, the average seller in California has been in his or her home for 10 years. Further, 71% of Californians aged 55 or older haven’t moved since 1999.
“The good news is lots of boomers are sitting on mountains of home equity,” Levine said. “This is a huge market opportunity. Some want cash for living expenses….Folks don’t save, so the bank account is the home. The forced savings vehicle will be something people are increasingly looking to monetize.”
Written by Elizabeth Ecker