Southern California has seen dramatic increases in home values in the last few years. We have watched home values go up around 20% in 2013 and 18% in 2014(42% cumulative increase). While at the same time, the US Census Bureau reported in September 2014 that in the United States the median household income(adjusted for inflation)has been trending downward, current incomes are 8% lower than in 2007, the year before our last recession. If rising incomes are supposed to drive up home values then what does that say about the housing market today? Much of the increase in our housing market has been due to investors flipping properties. These investors have now left the market as they no longer have the profit margins to make it work. As buyers now make on average 8% less than they did 7 years ago, most cannot afford a home that has gone up 42% or more in the last 2 years.
Home values have been leveling off. Currently 17% of appraisals are coming in lower than the contract price. There are many predicting the housing market to drop again, including Reddit, a major real estate site, as well as Joshua Pollard, a former Goldman Sacs Executive. Mr. Pollard has some convincing evidence he uses in predicting that we will have a greater drop in the housing market than in 2008.
You may think, ‘this doesn’t affect me’ as I do not have a mortgage payment, or my payment is very affordable. But, there is opportunity for the prepared if the housing market does actually drop. Traditionally rental prices slowly tick up. In 2008 when values were crashing down, many lost their homes and the increased demand for rentals pushed rent prices up. 2010 would have been an ideal time to purchase a rental property or two.
Let me suggest using a Reverse Mortgage as a TOOL to cover the down payment, or entire purchase price of acquiring rental properties in the future or for purchasing stocks at bargain pricing. For example if you are 62 and have a home worth $500,000 today, you could get over $251,000 on a Reverse Mortgage and leave it safe in a Reverse Mortgage Line of Credit (LOC). This money can never be taken away and it can never be frozen and taken away like HELOC’s(Home Equity Lines of Credit) were in the housing crash of 2008. There is no interest charged to you on the LOC money until you actually take it out, you would only accrue interest on the loan costs(there are no monthly payments on a RM. Estimated cost of $11,200). The rate on the HECM Annual is currently 3.043% (10/31/14). There are no payments on a Reverse Mortgage but the Annual carrying costs would be around $481/year (interest and monthly MIP). The positive offset is that any money left in a RM LOC grows; in this case by 4.293% which is $10,775 per year. So,let us suppose that you leave this money in a RM Line of Credit and wait 3 years for housing prices to hit the bottom you would have roughly $294,773 available to purchase stocks, to purchase a rental home for cash, or to use as a down payment on multiple rental homes.
The money in your RM LOC is safe and Guaranteed by the FHA, even if your home value dropped from $500,000 to $300,000 you would still have the $294,773 available on your LOC to purchase whatever you would like. All of this is done without any monthly carrying costs to you. You may want to use this money to invest in:
- Rental properties at significantly lower pricing while maintaining high profitability
- Stocks at significantly lower pricing (in 2008 & 2009 the stock market crashed right along with housing)
- Various investments your financial adviser has
We have seen a housing crash nearly every decade. Whether or not we do have another housing crash coming soon, wouldn’t it be comforting to hedge your bet and know you have almost $295,000 of your home value protected from a crash with no out of pocket carrying costs to you? Luck is nothing more than being prepared when an opportunity arises. How lucky will you be? Anonymously check your Reverse Mortgage qualification on our Calculator today!
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