The emails questioning my sanity arrived soon after publication of last week’s column. It reported on the use of reverse mortgages to buy new homes with 50 percent down — but never having to make a mortgage payment for the balance of the cost.
Some thought the whole thing was some kind of trick. Others knew someone who had taken out a reverse mortgage and lost their home. There’s a lot of distrust out there for a tool that seems “too good to be true.”
So let me tell you why I have been writing about reverse mortgages and why I think they are so important. Willie Sutton famously observed that he robbed banks “because that’s where the money is.” Well, the wealth we have in our homes, our home equity, is “where the money is” for all but the richest Americans.
The Federal Reserve’s Survey of Consumer Finances reveals and repeats this fact every three years. I first saw it in the late 1960s. That’s more than 40 years ago. So this is bedrock reality. It is not financial ephemera. It’s one of the reasons we think of our homes as our castles.
We can also see the importance of our homes every three months in the Federal Reserve Flow of Funds report. The most recent report, for the end of 2015, has the telling figures on Page 129.
It shows that we owned homes worth $22 trillion in 2005, the year before the housing bubble broke. We also owed $8.9 trillion on those homes, leaving home equity of $13.1 trillion.
A year later, even as values peaked, we were borrowing even more. So home equity declined a bit.
When the housing market bottomed in 2011, our houses were worth $16.2 trillion. Our mortgages totaled $9.7 trillion, leaving home equity of $6.5 trillion. That’s a wipeout, a loss of 50 percent.
But at the end of 2015, home values had returned to 2005 levels, $22.0 trillion against mortgages of $9.4 trillion. That left homeowner equity at $12.6 trillion, a stunning $6.0 trillion increase from the 2011 market low.
Whether you measure the total or the increase, it’s a lot of money. In comparison, ownership of mutual fund shares increased by $3.5 trillion to $8.1 trillion over the period. Money market shares declined in amount. Checkable deposits rose by only $500 million. And time and savings deposits rose by only $1.6 trillion to $8.4 trillion.
Home ownership may not be the entire ballgame, but it accounts for most of the innings. Slice the figures any way you like, and the action is still in home ownership. And home equity is where the vast majority of working and near-retirement Americans have the bulk of their net worth.
For those who were already retired or just retiring at the beginning of the meltdown, it was a total disaster. Their 401(k) plans became 201(k) plans, some joked. Financial planners, who love abstraction, noted that it was bad to suffer “sequence of returns risk.” That’s statistical talk for starting retirement just before, or during, a major bear market.
But that’s where we are. Millions of people lost half their savings and parked what remained in cash. They missed the market recovery. That’s another reason the biggest pool of money most Americans have to help pay the bills during their retirement years is their home equity.
So reverse mortgages are important. They are the primary tools for accessing your home equity. Today, most workers don’t have pensions. Many have managed to save only a small amount of money. Still others saw a large amount of savings become a small amount. For all these people, home equity may be the difference between a comfortable retirement and a miserable one.
So, let me go on record: I predict we are just entering the age of reverse mortgages.
You can use one to provide lifetime income and stay in your house until you die. You can sell your home and use some of the proceeds to buy another and never make a mortgage payment, even as you create a fund of cash to invest.
Whatever you do, you will increase your retirement standard of living in a measured and predictable way.
SCOTT BURNS is a principal of Plano-based investment firm AssetBuilder Inc.