While few things in life are guaranteed, some are all but certain – including fluctuations in the housing market. Just last year, the US housing market peaked. Amidst the 2022 booming real estate market, home buyers were left in a frenzied contention of bidding wars as homes sold for tens of thousands of dollars over asking price. Fast forward to just over one year later, and not only has the market seemingly cooled, but so has buyer behavior. In fact, more and more buyers are now choosing to back out of home purchase contracts.
According to a recent report from Redfin, nearly 60,000 deals to purchase homes were canceled in August 2023 – a figure that translates to nearly 16% of homes under contract.1 So, what’s to blame for seemingly sluggish sales in today’s housing market? There are three key factors at play:
- High Interest Rates
The higher the interest rates, the more expensive mortgages are for buyers. As of October 2023, mortgage rates have surged to over 7%, the highest they’ve been in 21 years, according to Freddie Mac.2 Just last year, mortgage interest rates hovered around 5%. For a borrower with a $300,000 loan, this difference in rates could cost them an additional $400 monthly.3 With this in mind, many home buyers are choosing to rethink their purchase timeline – after all, it could literally pay to wait for rates to fall.
- Limited Inventory
In the high-interest rate environment, many people are reluctant to give up their sub-5% interest rates. Just a few years ago, during the COVID-19 pandemic, interest rates dropped to historic lows – the lowest ever recorded at 2.65% in January 2021.4 As a result, many homeowners chose to take advantage of the low rates and refinance their mortgages. Since then, interest rates have nearly tripled, leaving many homeowners opting to stay put and enjoy the comforts of their low mortgage payments. And with fewer people opting to move or sell their homes, the housing inventory is in short supply.
- The Competitive Seller’s Market
Limited housing inventory creates an imbalance in supply and demand. While demand for homes far exceeds the supply of homes on the market, these factors have created an especially competitive seller’s market. As such, homes are selling quickly – and for much higher prices. For sellers, this creates an enviable situation of having to navigate and consider multiple offers, with several above asking price. For buyers, this market presents the all-too-familiar challenges of inflated pricing, bidding wars, and potentially paying more for a home than its appraised value. As a result, many buyers who are unwilling or unable to overcome these challenges are left canceling their purchases.
The high-interest rate environment has resulted in less housing inventory, which has resulted in a competitive seller’s market. Now, how’s that for a vicious cycle? While these factors make a great market for someone selling their home, they make a less-than-ideal situation for someone looking to purchase a home.
What’s a buyer to do?
With all these challenges listed above, buying the home you really want or need may seem impractical or out of reach. But it doesn’t have to be. For homeowners aged 62 or older who are looking to purchase a new home, there is another solution – buying a home with a reverse mortgage.
A reverse mortgage – also known as a Home Equity Conversion Mortgage (HECM), allows you to convert a portion of your existing home’s equity into cash to use as you wish. Created in 2009, the federally-insured HECM for Purchase program was designed to streamline home-buying transactions for older Americans who want to take advantage of a traditional HECM reverse mortgage. It combines two transactions – buying a new home and financing part of the purchase with a reverse mortgage – into one.
A powerful financing tool, a HECM for Purchase can help you buy a more suitable home in retirement, while still conserving cash and assets for future expenses.
- Supersize your purchasing power.
By combining your down payment with reverse mortgage loan proceeds, you can more comfortably afford a home with better amenities or in a more desirable location.
- Keep more cash for the things you need.
A HECM for Purchase allows you to buy a new home without making monthly mortgage payments, as long as you keep current with property taxes, insurance, and home maintenance. Without this significant expense each month, you can free up significantly more cash and assets to help cover retirement expenses and improve your cash flow.
- Get the home you want without settling for less.
Buying a new home for retirement doesn’t have to mean downsizing your goals. A HECM for Purchase can help you right-size to a home that fits your current and future plans – whether that’s being closer to family, clearing out the clutter, or getting a home with upgraded features.
Addressing Today’s Market with HECM for Purchase
If you’re looking to relocate, downsize, or “right-size” to your retirement dream home, you are in good company. Nearly 40% of home purchases are being made by members of the baby boomer generation.5 But in all likelihood, many purchase contract cancellations are coming from this cohort, too.
As outlined earlier, there are plenty of reasons why a buyer may choose to back out of a purchase contract. Fortunately, a HECM for Purchase is a brighter alternative – and one that could help you streamline the buying process.
While rising interest rates have the potential to drive up monthly mortgage payments, with a HECM for Purchase, monthly mortgage payments are optional.6 With the flexibility to make payments as often or as little as you wish, you can mitigate the burden of having such a sizable financial commitment each month.
And when it comes to competing with other buyers in a seller’s market, a HECM for Purchase can set your offer apart from the rest. With a larger down payment (typically between 48% to 67%) required,7 your offer could appear much stronger than the traditional 20% down payment offer. This also signals to the seller that you’re financially qualified to complete the purchase and will make the process a smooth transaction.
Whether you’re nearing retirement or already in it, a HECM for Purchase can allow you to buy a home that better fits your needs – even amidst the challenges of today’s housing market. Ready to take the next step in purchasing your retirement dream home? At Longbridge Financial, we can help.
We’re a Federal Housing Administration (FHA) approved lender and specialize in helping older homeowners reshape their financial future by educating them on the many uses of reverse mortgages. In working with us, we’ll take the time to get to know you, your goals, your home, and your finances as we discuss your options and help you determine whether a HECM for Purchase is right for your unique situation.
For more information on unlocking the power of your home with a HECM, contact the Longbridge team today.