Will Zero Percent Interest Rates Force Older Homeowners Into Reverse Mortgages?

I can honestly say that the current state of the housing market in the U.S. is unlike anything we’ve ever seen in it’s history. Though the Federal Reserve has implemented one round of money printing after another, with unprecedented amounts of cash going to help bolster the secondary mortgage market, housing is still barely conscious in spite of the Fed’s relentless attempts to revive it.

News reports of a housing recovery are becoming more common as we approach the 2012 holiday season. But I would beg to differ with the news media on this one. Yes we probably have hit a bottom where prices are concerned, but a slight improvement in prices relative to the worst price drop in U.S. history is hardly a reason to declare that the housing market is in recovery.

When you consider that interest rates for mortgages are near all-time lows, there is even more reason to wonder what passes for a “recovery” these days. If this were any other recovery period from any previous recession, holding interest rates near zero for several years would have been enough to re-inflate the housing bubble. This is, indeed, the outcome that Bernanke and his easy money policies have been hoping for. See article here for excellent analysis of this point.

But instead of igniting a true housing recovery, these low rates have resulted in a catastrophic drop in earnings on savings for older home owners and even wealthier retirees. When it comes to the loss of earnings on savings accounts and traditional investments like CD’s, it’s a huge disaster for seniors who have spent their lives building savings for retirement, only to now find that their anticipated income is evaporating.

As a middle-aged baby boomer with an elderly but basically healthy mother, this is becoming a pressing issue that has forced us to think of ways to increase income via other investments or looking at alternative sources of funding if her savings were to run out at some point.

Born in 1934, at the height of the great depression, Mom grew up with those “old fashioned” values of frugality and conservation. She saved money and she did not waste a thing. In the world that used to be America, those values were guaranteed to translate into a comfortable retirement with solid income from a variety of relatively safe investments – like a few rental properties, some cash in an interest bearing account, and a few CD’s down at the bank.

Back in the 1990’s those CD’s were paying around 7%. In the 1980’s some were earning double digit returns. But today, not so much. At present, she’s getting about one-half of one percent on 1 year bank Certificates of Deposit. Her rental houses have rented for the same rate for about 6 years now, yet tenants are struggling more than ever to pay on time.

Property taxes have gone up, as have insurance costs. These two items now eat up about 3 months rent each year. And since 2008 her rental houses have lost about 35% of their value. As has her personal residence. What appeared to be a solid plan for long term income has now become a challenge. Fortunately for Mom she has help from well educated children who can help her make the best decisions for her benefit. But, that being said, it’s become a real challenge for her to maintain a spendable income that allows for a higher standard of living. She’s avoiding trips and putting off buying items like that new sofa she’s always wanted because of her loss of income.

The virtually-zero interest rates that the Federal Reserve continues to perpetuate are costing seniors big money in lost income on savings. Income that was predictable for years, but has now evaporated like a mist during the tenure of Ben Bernanke as Chairman of the Federal Reserve. In my opinion, a continuation of quantitative easing will only drive the prices of goods higher, while forcing income on savings and traditional investments down to almost nothing, leaving millions of seniors and retirees squeezed between a rapidly rising cost of living and much lower incomes from savings.

This is a perfect-storm type of scenario that is likely to force millions of seniors into reverse mortgages over time. If interest rates remain low, it’s just a matter of time before most seniors are living entirely off of social security. It’s an impossible economic situation for people who are too old to have the skills for “day trading” or learning about playing the commodities market. Reverse mortgages will be the only viable recourse for many senior home owners, and it’s likely that the borrower’s net proceeds from those loans will also be significantly lower, due to the higher foreclosure rates.

If you are a lender this is likely to be a booming opportunity if you deal in reverse mortgages. If you are a senior who is considering a reverse mortgage, I would advise caution. Personally I do not like or endorse reverse mortgages. But the fundamentals in the senior sector are highly likely to head in this direction.
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Donna S. Robinson is a real estate investor, author and residential market analyst located in Atlanta, GA. Follow her on twitter at donnaconsults. Her latest book, Basics Of Real Estate Investing is now available on Amazon.