Reverse Mortgages & The Matter of Prudent Risk

by Peter G. Miller
May 20th, 2008

It was nearly two years ago that the Alliance for Retired Americans, a group with some 3 million members, wrote about reverse mortgages.

What’s interesting about what they wrote is that in the past two years real estate markets in many areas have gone from boom to bust and yet their analysis remains largely on track.

As ARA wrote:

>>>With the main sources of retiree income –- Social Security benefits, pensions and personal savings –- dwindling, some financial experts are encouraging people to use their home equity to help fund their retirement. Real estate prices across the country have soared in recent years, greatly appreciating the values of homes in many areas. For those who have not been able to save, the various options to “monetize” their home, from selling and investing the proceeds to reverse mortgages, may provide some income. According to calculations by Wells Fargo & Co., the assets in pension plans totaled $1.7 trillion last year. Assets in other company-sponsored plans, such as 401(k), totaled $2.8 trillion and Individual Retirement Accounts (IRAs) had assets of $3.7 trillion. In the same year, the home equity held by all households was nearly $11 trillion. “Relying on home equity is extremely risky, as homes may not appreciate as fast in the future as they have in the past decade,” said Edward Coyle, Executive Director of the Alliance. “Furthermore, the reality is that nearly 30 percent of older home owners are both house poor – their homes have a low market value – and cash poor.”

It is, of course, right that relying on home equity can be risky, especially in an environment where home prices are declining in many areas. Equity in senior housing has dropped, according to the last report by the National Reverse Mortgage Lenders Association (NRMLA), but not a whole bunch: By the Association’s calculations elder equity stood at $4.212 trillion at the third quarter of 2007, a drop of just $25 billion from the second quarter.

But the core question is this: Where have most people done better — in a financial sense — then real estate? Not those looking for quickie profits with no money down, but those who have held real estate for the long term?

It’s true that relying on home equity can be risky, but so can relying on stock, continued employment with a given company or nice vacations fueled with cheap gas. In the end, there’s always risk in the marketplace — no matter which marketplace you’re in.

It will be interesting to see the next equity report from NRMLA, and yet even if the numbers are down seniors will continue to hold trillions of dollars in untapped real estate value. In effect, the risk of real estate ownership has paid off for most seniors in a most-tangible way with real equity and thus real wealth.

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One Response to “Reverse Mortgages & The Matter of Prudent Risk”

  1. Lisa Dunn Says:

    Thank you thank you for your commitment to blogging about reverse mortgages and stating in english the pros and cons. In an industry where everyone wants to be the expert (ANY senior service) at a time when REAL experts are needed, your information is priceless.