Housing slump changing options for older Americans

Aging in place has become the only possibility for many as the weakened economy erodes real estate values and retirement savings

by MARK MILLER

For a growing number of older Americans, the housing slump has changed the concept of “aging in place” from a lifestyle choice to the only choice.

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.

Continuing care facilities

One type of community feeling the crunch right now is the continuing care retirement community, which requires a large upfront payment. This allows seniors to stay in a single location that can meet their health care needs for the remainder of their lives; in this sense, the continuing care communities 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, chief executive of the American Association of Homes and Services for the Aging, an association of nonprofit 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.

Applications the the continuing-care residences 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

Another potential source of help is reverse mortgages. New federal rules that took effect in January make it possible to use these home equity conversion mortgages to purchase a new home.

While an conversion mortgage can’t be used for moves into retirement communities where the residents don’t own equity, 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 conversion 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 conversion loan 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 conversion loans from $417,000 to $625,500. The new loan limits are in force for 2009 only.

Staying where you are

Of course, the other option is aging in place. Aging in place is the most attractive choice for many. A 2007 AARP survey found that 89 percent of Americans would like to live in their current homes as long as possible, and the number rose to 95 percent when people older than age 75 were asked the question.

But the survey also showed that very few people have taken steps to modify their homes to accommodate aging. And aging in place also creates challenges for communities to provide the services aging residents will need, such as one-stop shopping locations, shuttle services, age-appropriate fitness and community centers, and even something as basic as sidewalks.

Minnix expects that retirement communities such as CCRCs will play a role in responding to these challenges. Some already are expanding their services to people living in homes in their surrounding areas.

“In the next decade, we’ll see a lot more products and services — and maybe even financing mechanisms — for people who want to stay where they are,” he says.