Here's a quiet part of the housing crisis we haven't heard much about -- yet. The nearly frozen residential real estate market in many parts of the country has made it very difficult for seniors to sell their homes when the time comes to move for health or lifestyle reasons.
After Social Security, real estate is the most important financial asset for most seniors. Many have built up substantial equity in their homes that they expected to use in the event they needed to move into a retirement community that offers health care services.
One type of community feeling the crunch right now is the continuing care retirement community (CCRC), which requires a large upfront payment. This allows seniors to stay in a single location that can meet their healthcare needs for the remainder of their lives; in this sense, CCRCs are a sort of insurance product funded by the single upfront payment.
"It's usually structured so that you can take equity from the house, make that your entrance fee and then pay monthly based on need," says Larry Minnix, CEO of the American Association of Homes and Services for the Aging (AAHSA), an association of non-profit organizations that offer a continuum of aging services ranging from adult day services to continuing care retirement communities.
Now, homes aren't selling and prices are falling. The S&P/Case-Shiller home-price index of top 20 cities was down 25 percent as of November last year compared with its peak in 2006. At the same time, many older Americans have been hit hard by sharp erosion in their retirement portfolios, another potential source of funding for a move.
CCRC applications are declining, and some communities are responding by providing assistance to would-be home sellers. "Some are suspending or postponing entry fees," Minnix says. "Others are providing bridge loans or retaining real estate specialists to help people prepare and sell their homes. Everyone is trying to get creative in providing help." Some developers also are stressing development of more affordably priced housing units.
Reverse mortgages are another potential source of help. New federal rules that took effect in January make it possible to use these home equity conversion mortgages (HECM) to purchase a new home. While a HECM can't be used for moves into retirement communities where the residents don't own equity (such as CCRCs), the new rule can help facilitate sell-and-buy transactions by giving the seller the flexibility to accept a lower price and still afford a move.
With HECM loans, the percentage of equity you can borrow is roughly 10 percent less than your age. So a 75-year-old individual seeking to buy a $300,000 home could get 65 percent of the equity as a loan -- roughly $200,000. The new rules don't permit any other mortgage loans on the new property, so the balance must be funded with cash from the seller's previous home.
Depending on how much cash is generated from the home sale, the HECM can generate cash above the new home's purchase price, allowing the borrower to pocket the difference and add to cash reserves.
An additional positive development: The recently signed economic stimulus bill temporarily lifts the limit on the size of HECM loans from $417,000 to $625,500. The new loan limits are in force for 2009 only.
Learn more about how how the housing crisis is affecting seniors at RetirementRevised.