Ways to Utilize Home Equity in Economic Uncertainty | Guest Post
Newspapers have been splattered with headlines that would make anyone terrified—not just homebuyers. From the highest inflation rates in 40 years to forecasting the impending recession, economic uncertainty is everywhere. One of the markets affected by this the most is real estate. With interest rates rising, homebuyers are becoming hesitant to dive into this time of transition and volatility.
For the past 18 months, we’ve largely been in a seller’s market. The demand outweighs the supply all across the country. Between January 2021 and January 2022, the median price for active home listings jumped 19 percent to $450,000. However, with rising costs due to inflation, monthly available income for housing appears to be decreasing by 2.46 percent for homes sold in the same time period.
Across Denver and the nation, markets are correcting and beginning to cool. It’s likely that in the foreseeable future we’ll continue to see interest rates between 5-6 percent, fluctuating often. The good news is that this is expected, and when the economy becomes predictable, it also becomes manageable. Only when the Fed does something unexpected, will the real estate market have a knee jerk reaction—which is always possible, but not likely.
Market Volatility Ramifications on Retirement
It’s no secret that market volatility can affect money portfolios—especially those in retirement or on a fixed income. But long-term investments, like property, provide much needed stability in an unpredictable time.
A 2022 report found that retirees have a flawed perspective on the biggest threats to their retirement. The biggest threat was not saving enough because retirees underestimate their life expectancy. However, most believed that market volatility would pose the biggest threat by overestimating the effect on their financial status and underestimating the impact of long-term investments.
Current retirees are pulling liquid money out of their portfolios to support their retirement plan. But when the market is down 10-20 percent, the longevity of their plan is cut in half. A 30-year plan might now only last 15-years—compounding all of the biggest threats. However, at 72, seniors are required to start pulling funds out of their retirement account. The volatility of the
current market makes this dangerous. When planning for the future, there should be a variety of tools in the retirement toolbox, including home equity.
Home Equity as a Financial Asset
Home equity is the underrepresented financial tool that can be utilized by retirees in times of economic uncertainty. There is over $11 trillion of senior home equity in the nation today. Most of it is sitting on the sidelines, not being used.
While the real estate market is starting to cool, home prices are still some of the highest we’ve ever seen, and because of that, the equity available is equally high. When home prices go down, so will the amount of available equity. With the right real estate partner, seniors can use this to preserve and protect the rest of their retirement assets by incorporating home equity into their overall retirement plan. The FHA recently changed their time frame to allow an appraisal to be utilized for 180 days so that seniors can lock in high home values now.
The best way for retirees to get the most value from their home is through a reverse mortgage. A reverse mortgage is a payment optional mortgage that allows the homeowner to tap into their home equity for anything they want or need. For example: long term care insurance, in-home care, home improvement, traveling, gifting, inheritance, home renovations, a life insurance policy, ROTH IRA conversion, or simply cash they may need during economic downturns.
Reverse mortgages are a vehicle to tap into all the unused home equity throughout the nation. By allowing seniors to access illiquid equity, retirees can feel more secure using funds for anything without any income tax to worry about.
Reverse mortgages can be utilized as a financial tool for long-term stability
In Denver, July's median detached home price of $650,000 is the highest on record. While we don’t know what the future holds, if the past tells us anything, it’s that prices ebb and flow, and after peaks, there are usually valleys. But for now, home values are high which gives retirees access to more equity than ever before.
Anyone 62 years and older should speak with a financial advisor to consider utilizing a retirement mortgage or a reverse mortgage to weather any market volatility on the horizon. No matter how home equity is utilized, it should be a first thought not a last resort, so that it can work as a buffer of protection for the other assets in a retirement portfolio.
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