The Financial Implications of an Aging America

America is growing older. By 2040, the Census Bureau projects the number of Americans aged 65 and above will rise to 80 million, with seniors constituting an increasingly larger share of the overall population.

The graying of America will force our nation’s leaders to rethink policies in fields ranging from health care to public safety to transportation. For housing policymakers, a major challenge will be responding to the needs of the overwhelming majority of seniors who will seek to age in place in their own homes and communities.

According to a 2010 survey by the American Association of Retired Persons (AARP), some 70 percent of Americans who are 65 and older live in single-family detached residences, and nearly 90 percent intend to age in place in their own homes as long as possible.

Unfortunately, many homes lack the necessary structural features and support systems to make independent living into old age a viable, safe option. Making structural modifications like ensuring barrier-free entrances, widening hall ways, installing hand rails and grab bars, and creating roll-in showers are often necessary to accommodate the desire of seniors to remain in their own houses.

Home-based services that assist seniors with daily activities like cooking, bathing, dressing, and house cleaning are also essential. With millions of Baby Boomers heading into their retirement years, the need for these services will grow significantly in the coming decade.

Making structural modifications to one’s home and supporting an array of home-based services can be expensive.

For some seniors, particularly those who are “house rich but cash poor,” the utilization of home equity — the value that is stored in our homes after years of making monthly mortgage payments — is the primary means by which these costs are financed. Reverse mortgages under the Federal Housing Administration’s Home Equity Conversion Mortgage (HECM) program can be an important tool for homeowners seeking to tap into this home equity to meet aging-in-place and other retirement needs.

A 2012 report by the Consumer Financial Protection Bureau (CFPB), however, raised a cautionary flag when it found that few consumers fully understand the financial mechanics of reverse mortgages. For example, many seniors who take out reverse mortgages do not realize they remain responsible for paying property taxes and homeowner’s insurance.  The increasing complexity of reverse mortgages also makes it difficult for housing counselors to provide effective guidance to their clients.

Adding to these concerns are the conclusions of another CFPB report released in May. This report, entitled Snapshot of Older Consumers and Mortgage Debt, shows that older Americans have accrued less home equity than their counterparts a decade ago. It offers the following sobering facts:

• From 2001 to 2011, the percentage of homeowners aged 65 and older who are carrying mortgage debt increased from 22 to 30 percent (3.8 to 6.1 million). During this same period, the percentage of homeowners aged 75 and older with mortgage debt skyrocketed from 8.4 to 21.2 percent.
• Older Americans are carrying larger mortgage balances into their retirement years than their cohorts a decade ago. From 2001 to 2011, the median mortgage balance of homeowners aged 65 and older increased 82 percent.
• Seniors also owe more on their mortgages in relation to the value of their home – from 2001 to 2011, loan-to-value ratios increased from 30 to 46 percent.
• In addition to having less home equity, older Americans pay significantly more in housing costs when they have a mortgage. In 2011, older homeowners with a mortgage spent $800 or 290 percent more per month than their counterparts with no mortgage.

The implications of seniors carrying higher mortgage balances (and having less home equity as a result) are not well understood. With Americans living longer lives, many are already financially unprepared for retirement. Decreasing home equity wealth can pose additional problems for those seniors whose homes are their primary assets.

As part of its How Housing Matters initiative, the John D. and Catherine T. MacArthur Foundation has recently funded a three-year study to assess whether, and under what circumstances, reverse mortgages can lead to increased financial security, well-being and independence in our older years. This study should provide some much-needed and timely guidance to policymakers seeking to craft effective responses to the aging-in-place phenomenon.

These issues and more will be examined at the BPC 2014 National Housing Summit, scheduled to take place at the Renaissance Washington, DC Downtown Hotel on September 15 and 16, 2014. You can register for this important event at www.bipartisanpolicy.org/housingsummit.