Will home values become another domino in the wake of the Coronavirus crisis?
By George A. Downey
At the time of this writing, the unprecedented shock of the health and financial crisis driven by the coronavirus pandemic is unfolding with no predictable end or solution in sight. This extraordinary disruption of living norms and business activity is too extensive at this time to speculate what the final outcome will be, except that financial losses will be substantial and prospective recovery uncertain. However, one thing is assured – our lives and financial futures will be changed for the foreseeable future.
What will happen to home values?
Since the Great Recession, Massachusetts home prices soared to record levels today driven by strong economic conditions, population growth, consumer confidence, and shortage of housing. That was yesterday, tomorrow is a question mark. It’s been a sellers’ market, that may be about to change.
Uncertainty and fear breed doubt and caution, which more than likely will weaken buying demand. Reduced buying demand logically leads to lower prices. Lower prices form the basis for comparable sales data. Lower comparable sales data reduces the lending limits for mortgage financing. And so, a trend is born.
At the end of the day it’s all about supply and demand. History has shown that trends like this develop quickly and recover slowly.
How will this affect retirement security?
Unfortunately, those in, or approaching retirement, may be among the most vulnerable if: (1) retirement savings are further diminished by market losses; and (2) home values decline. Such a double-bind would severely affect the retirement security for the great number of aging Americans.
Retirement experts consistently report: fear of running out of money in retirement; and sequence of return risk (forced selling of securities in declining market conditions) are the most important issues confronting aging clients and their professional advisors.
What can be done to protect home value and retirement security?
For eligible older homeowners, who want to age in place at home, there is a solution that will enable them to lock-in today’s record market value and provide guaranteed access to accumulated home equity for current and future financial needs. Effectively, this guarantee provides a hedge against property value decline, should that occur.
The solution is the HUD/FHA federally insured, Home Equity Conversion Mortgage (HECM) reverse mortgage. Most commonly misunderstood, primarily due to lack of knowledge and misconceptions, this program provides unique and timely solutions to a number of market risks and retirement challenges.
Most importantly, HECMs provide access to a portion of home equity to improve cash flow and liquidity without selling the home. HECM benefits, guaranteed as long the loan remains in good standing, include:
- No give up of home ownership – it’s a mortgage.
- No monthly payment obligations – prepayments are permitted without penalty but not required. Monthly charges are deferred and accrue.
- No maturity date – repayment not required until no borrower resides in the property.
- Non-Recourse loan – neither borrowers nor heirs incur personal liability. Repayment of loan balance can never exceed the property value at the time of repayment. If loan balance exceeds property value at time of repayment the lender and borrower(s) are protected by FHA insurance.
- Credit line growth – the undrawn balance of the credit line grows (compounding monthly) at the same rate charged on funds borrowed.
- Funding and loan terms are guaranteed – cannot be frozen or cancelled unlike traditional home equity lines of credit.
- Borrower obligations (to keep loan in good standing) are limited to:
- Keeping real estate taxes, liability insurance, and property charges current
- Providing basic home maintenance
- Living in the property as primary residence
Selling and relocating to a more suitable home.
For others, it may be time to consider selling the home and relocating to a more suitable home, to increase savings, move closer to relatives or friends, or perhaps move to a more favorable climate. Generally, two housing options are available – rent or buy. Renting enables the sellers to increase savings from the sale proceeds to accommodate the new lifestyle. Buying requires the reinvestment of home sale proceeds to purchase for cash, or finance a portion of the purchase price with a new mortgage.
Purchasing a house or condominium with a HECM reverse mortgage
A new home may be a more suitable house or a condominium. To avoid the burden of monthly payments, buyers often purchase for cash, or they may not qualify for traditional mortgage financing under the new more stringent qualifications. The problem of a cash purchase is it depletes significant funds that otherwise might be available to increase savings.
The HECM reverse mortgage may provide a better solution. Consider the benefit of purchasing with a down payment of approximately fifty percent versus one hundred percent cash, financing the balance with a reverse mortgage that does not require any loan payments, and enables the borrower to increase savings by the other fifty percent for future needs.
End Notes
The disturbing events brought on by the coronavirus crisis are a wakeup call for savvy professional advisors and senior homeowners to the potential risks of real estate value decline. Each situation is different requiring accurate information, objective assessment, and understanding of options available.
This is not the time to procrastinate. This is the time to learn, assess, and take appropriate action to preserve assets for dark days ahead…which, hopefully will never come.
To learn more, you are welcome to contact us for more information.
George Downey (NMLS 10239) is the founder of Harbor Mortgage Solutions, Inc., Braintree, MA, a mortgage broker licensed in Massachusetts (MB 2846), Rhode Island (20041821LB), NMLS #2846. Questions and comments are welcome. Mr. Downey can be reached at (781) 843-5553, or email: GDowney@HarborMortgage.com
…requires a “Total Wealth” perspective. What is “Total Wealth?” It’s anything that can be converted into cash to fund your retirement expenses and dreams. Most of us think of savings accounts, mutual funds, annuities, and what’s in our wallets as our “liquid” wealth, but there are other assets — sometimes sizable — that can and should be included as we manage out total wealth strategy.