Drop in housing market has retirees seeking shelter

While home prices have cooled in response to rising mortgage rates, there's still decent money to be made by retirees willing to employ a 'retire and relocate' strategy.

The decline in home values may send some retirees running for shelter.

After peaking last June, U.S. home prices slid 4.4% in the back half of 2022, according to the Case-Shiller 20-City Home Price Index. The housing market was pinned into submission by a steady diet of inflation-fighting Federal Reserve rate hikes that lifted the benchmark 30-year fixed mortgage rate to 6.73% by the end of December, more than double from where it started the year.

Things haven’t improved much since then, with that same 30-year fixed rate recently crossing 7% and the odds of a recession climbing. As a result, many market strategists don’t expect the housing market to turn around in the near future.

For example, Big Four accounting firm KPMG’s most recent report forecasts another 8% drop in the Case-Shiller index in 2023. KPMG also sees existing home sales sinking to 3.9 million in 2023, down 23% from 2022, matching the drop that occurred in 2007. For those who may have forgotten, or suppressed the memory, late 2007 was the start of a significant downturn in the economy.

KPMG expects single-family home sales, where supply is tight and prices still relatively high, to drive those declines. And that’s especially bad news for retirees who are counting on those homes either to help fund their retirement through loans, or as an asset to sell or tap into should economic times get tough.

“While I always strive to help clients implement a plan that doesn’t require the liquidation of their home to succeed, there are many retirees out there who will have no choice but to liquidate their home to accommodate their income or liquidity needs,” said Dan Perrino, principal wealth manager at national RIA Savvy Wealth.

“I always try to set realistic expectations with clients, so if their desired retirement lifestyle will likely lead to their liquid assets being drawn down to zero, then I am very clear about how long their liquid investments are likely to last at their current spend rate and advise how a change in lifestyle or future home sale may be required,” Perrino said.

If retirees are willing to employ a “retire and relocate” strategy, there’s still decent money to be made despite the housing market’s recent cooling.

A report by Vanguard Group revealed that the typical homeowner age 60 or older who sold their home in 2019 and relocated to a cheaper housing market accessed about $99,000 in home equity; those in the top 10th percentile pocketed an average of $347,000 using the strategy. The average homeowner in that age group holds $223,000 of retirement savings in financial accounts, according to Vanguard’s estimation, so the additional funds could prove vital if things get tight in retirement.

Location remains paramount when making real estate decisions. The spread in a retire-and-relocate transaction essentially depends on it. Moving from a high-tax area to a higher-tax area, for instance, defeats the purpose for retirees seeking to stretch their savings.

However, there’s more to a real estate transaction than location, location, location. Timing matters, too.

“The real estate market environment is likely going to be tough over the next year or two, so now is a great time to start speaking with the applicable clients about preparing for the next attractive opportunity to sell their home, so if and when the real estate market environment shifts more to the seller’s favor again, they are prepared and ready to move,” Perrino said.

Despite the recent decline in home prices across the country, most homeowners are still way ahead on their home value compared to their purchase price. While this alone shouldn’t convince homeowners to sell their properties, advisors say it’s a great reminder to pay attention and get to know their situation.

“For retirees who already have plans to relocate, the newly found additional equity in their homes and the potential that their current home’s value may decrease in the future may just be the fuel they need to make it happen,” said Brian Hartmann, partner at Granite Bridge Wealth Management, part of Advisor Group. “That equity may help with a large down payment on their retirement home or provide support to purchase the next home for cash without the need for a mortgage.”

Hartmann added that retirees may also put home equity lines of credit to good use. In many situations, retirees open home equity lines of credit as a safety net without any immediate need to use the money.

“Getting qualified for a HELOC proactively can be beneficial in case lenders implement stricter requirements due to a further housing market downturn,” said Alex Koynoff, financial planner and owner of ATK Financial Prosperity. “Once approved, you don’t need to use it, but it can bring you peace of mind knowing that you have a source of funds should you need it. It can help you cover expenses to avoid selling investments when the stock market is down, as well as fund big purchases or projects.”

Ashley Bete, CEO and founder of Leap Analytic, a fintech real estate investment firm, says individuals 62 and older have approximately $11.5 trillion in untapped housing wealth, yet tend to be more conservative in how they view home equity, often seeing reverse mortgages as their only option. In his view, home equity agreements, which allow an institutional investor to pay a senior a lump sum of cash upfront for a fraction of the home’s equity, might be a better option for seniors seeking liquidity.

“HEAs are much more flexible because seniors don’t have to tap all their equity at once or sell their homes,” he said. “They can tap only the amount of equity needed instead.

“Also, seniors may not want to take on debt in their golden years. Reverse mortgages are debt. HEAs are not,” Bete said, adding that HEAs have no age threshold, so retirees of all ages can participate.

Ultimately, the best an advisor can do is recommend a stronger cash position or some austerity measures if the leveraging or liquidation of the home isn’t enough to support a client in retirement.

“Be prepared to be creative, flexible and understanding,” said Michael Nakanishi, financial advisor at Kingswood US. “Americans have always been told that the path to wealth is through homeownership, and I get that. We are all susceptible to this, but too much long-term investment and not enough short-term cash will not work well for everyone.”

It’s also worth noting that some advisors say a common mistake is for investors to view their personal residence as a store of value and opt to make extra payments on their mortgage. That means if retirees have locked in long-term fixed mortgages at historically low rates from before 2022, they should consider holding on to the extra liquidity versus paying down their mortgage. If it’s their forever home, that extra liquidity may allow them to fulfill other retirement goals, such as travel or gifting money to family.

“There is such a thing as healthy debt, and after paying off a mortgage there are few alternatives to get their cash out of the house other than selling or borrowing against their residence at potentially higher rates than the mortgage they paid off,” said Zach Morris, managing partner at Paces Ferry Wealth Advisors.