April 29, 2014

Why senior housing prices will be going up. And what to do about it. Now.

danBy Dan Dolan
Dan Dolan Homes

Consider these trends in the housing marketplace:

• During the recent economic downturn, we suffered a housing shortage of some 5 to 6 million new homes
• Builders are now in the process of filling that void and it’s exerting dramatic price pressures on construction materials and labor costs. We see new home prices rising about 5% a year or about twice the historic rate.
• We are adding some 10,000 retirees daily to the existing 50 million we have already. Many are looking to sell their existing homes and move to smaller, new, “senior friendly,” all-on-one-floor homes.
• For the first time in perhaps a decade, mortgage rates are expected to rise significantly as a result of government currency issues. Few of us may understand why, but just about all of us will be affected who seek to borrow funds– including home mortgages.

“We plan on doing something in a year or two”

During my weekend open houses, I hear this expression several times a day. For some visitors there may be a need for this delay. For others it may simply be arbitrary as to when they take their next step in moving to senior housing. And if money is no object, that may be perfectly reasonable. But for those seniors seeking to preserve their wealth, taking buying action now may save them thousands. And selling their current home now will likely help them secure a better price than the market will allow in the future. For the buyers of those homes, every point rise in mortgage interest rates has been shown to increase the cost of that home by approximately 12 percent. That reduces significantly the number of buyers qualified for a mortgage. Fewer buyers means more time on the market and generally a lower selling price for the property.

Why seniors who own larger homes are bailing out now

I have observed that many owners of larger homes, “McMansions,” have been taking advantage of the current strong market to sell those homes and move into some of the more senior-friendly homes such as we build. In many instances, they select a smaller home than they currently own, but they enhance their new home with upgrades like hardwood flooring, granite countertops, tile baths, 4-season rooms, etc. These homeowners are selling now to avoid some of the market trends described above. They believe the current market represents an opportunity to recover equity that they lost in the recent downturn. Many will apply some of the proceeds of the sale to the down payment on a new home. Any leftover capital from the sale can be reinvested or held as cash. In many instances, they use a reverse mortgage for purchase to reduce the amount of cash needed for a down payment and the great benefit of eliminating a monthly mortgage payment. This helps free up their capital for other investments if desired.

How to live in a $300,000 Dan Dolan Home for about $1000 a month in out-of-pocket costs. And no monthly mortgage payment

Dan Dolan Homes has no vested interest in if or how buyers finance their new home. We receive final payment for the home at the closing table regardless of how the home is purchased. But we have observed the experience of hundreds of buyers and have seen the reverse mortgage for purchase to be a highly effective tool for buyers interested in preserving their wealth. By way of summarizing the process, the buyer makes a one-time mortgage down payment based on his/her age and prevailing mortgage rates. The older the buyer, the lower the down payment. At age 70, the estimated down payment would be in the 45 percent range. That would be a down payment of about $135,000 on a $300,000 Dan Dolan Home. The exact amount would be determined by the lender. We can refer potential buyers to any one of several local financing organizations.

The down payment often comes from the sale of an existing home. Once the down payment is made, the buyer moves in and there is no further mortgage payment until the home is vacated and sold. At that time, the proceeds are used to pay off the mortgage and any cash left over goes to the seller or to the estate. The mortgage loan instrument assures the seller that there is never a mortgage deficit to be satisfied.

In terms of monthly out-of-pocket costs to live in a $300,000 Dan Dolan Home, we estimate the total to be in the range of $1000. That normally covers real estate taxes, homeowners insurance, HOA for lawn maintenance and snow removal, utilities and trash removal. In comparison, the monthly cost for a $250,000 Dan Dolan Home would be about $800.00.

Over the years it has been my privilege to help fill the retirement housing needs of thousands of seniors in Eastern Iowa. We have made every effort to help preserve their wealth by maintaining fair prices for above-average quality homes at locations that are both convenient and accessible. We will continue with our efforts to do so in exciting ways.

Based on current trends in the residential housing market, we anticipate the cost to seniors will rise significantly. By waiting “a year or two,” we believe that some seniors may have to adjust their expectations. For any interested seniors we recommend that they make arrangements in 2014 to acuire their “dream home.” Not only will they save money on the construction but also we believe they will get a better price for their existing home. And if financing is required, current rates will likely be more favorable than what we see in the future. As for seniors with “Mc Mansions,” we encourage them to act soon. Now could be the best time to secure your future. Time simply may not be on your side.

Filed Under: Featured, Finance