Is There A Reverse Mortgage Hedge In Your Future?
July 1st, 2008
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The fuel that makes reverse mortgages work is equity and the presumption of future equity. But what if equity levels decline?
Now, however, a new report glumly entitled The Housing Crash and the Retirement: Prospects of Late Baby Boomers raises a number of concerns.
The study tries to forecast what will happen next year if home prices stay the same as they were in March 2008, drop 10 percent or fall 20 percent.
According to authors Dean Baker and David Rosnick, “The decline in house prices since the middle of 2006 has led to the loss of more than $4 trillion in real housing wealth, more than $50,000 for every homeowner in the country. Real house prices are now dropping at close to a 1.5 percent monthly rate, which translates into a loss of almost $300 billion every month.
“Just as economists were slow in recognizing the housing bubble, they have also been slow to recognize the importance of this loss in housing wealth. This extraordinary destruction of wealth will have enormous implications for the retirement security for tens of millions of families at or nearing retirement age.”
Essentially, what the authors predict is that falling home prices will result in less equity and thus less personal wealth for most households, whether they have small, modest or substantial incomes.
In looking at these projections I am reminded of the reality that we don’t actually know what will happen in the future and that the overwhelming majority of homeowners will not be selling or refinancing their homes in the coming 18 months. Thus it may well be that they have less equity but as a practical matter it will not mean much.
The more significant question, I suspect, is what happens further down the road. Think in terms of 2012 — by then we should be over the worst of the mortgage mess, but what about other elements of the economy?
If you agree with the assessment that gloom and darkness lie ahead, then what does that mean in terms of reverse mortgages? The answer to me goes like this: If you think the financial sky is falling you should get the largest reverse mortgage you can find, right now, today, because tomorrow your property will have less value and will not support a larger loan. In effect, a reverse mortgage hedge.
For the full report, please see: The Housing Crash and the Retirement: Prospects of Late Baby Boomers.
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