Reverse Mortgages Likely to Grow with Next Generation of Retirees

Reverse mortgages appear to be the one bright spot amidst the current real estate credit turmoil. Several financial institutions have just launched or are expanding their reverse-mortgage business. Bank of America, for example, recently announced the expansion of its consumer reverse-mortgage offerings in several states in the Southeast, as well as in California and Florida. New product variations—such as lower age requirements, lower fees, and larger payouts—are providing more options to homeowners interested in obtaining reverse mortgages.

The 2006–07 MacroMonitor survey results reveal that some 6% of all U.S. households (6.9 million households) are interested in learning more about how reverse mortgages work. For now, this product accounts for just a very small share of the mortgage market. The same survey data show that some 81,000 homeowners currently have a reverse mortgage (fewer than 1% of all U.S. homeowners).

The reverse-mortgage market will likely grow as the first wave of Boomers moves into retirement. Traditionally a last-resort option for meeting the basic needs of aging homeowners, banks are starting to market reverse-mortgage products as another means of funding retirement living, including paying for travel and other indulgences. As more upcoming retirees face a gloomy future—low retirement-account balances combined with higher health-care costs and longer life expectancies—tapping home equity to fund retirement is an option that many homeowners will seriously consider in planning for their retirement.

Delegators, Collaborators, and the Self-Reliant

Since 1996, the MacroMonitor has asked financial decision makers to indicate the degree to which they use financial professionals to make decisions about their savings and investments. During this ten-year period in which the Consumer Financial Decisions (CFD) team has analyzed responses to this question, the vast majority of all households have indicated that they are in total control and rarely use financial professionals. In 2006, fewer than 10 million households are Delegators—that is, households for which financial professionals make a majority of the decisions about the household's savings and investments. Fewer than 30 million households are Collaborators—households in which financial deliberations are shared with financial professionals. More than 60 million households in 2006 are Self-Reliant—that is, are households that do not report using financial professionals to make their financial decisions. The remaining 15 million households in 2006 provided no response to the five-point–scale question.

After extensive analysis, we have found that many of the Self-Reliant have lower incomes and less investable assets and tend to be younger, less sophisticated, and less trusting than Delegators and Collaborators. What we find of particular interest is the sizable subsegment of the Self-Reliant households that would actually prefer greater interaction with financial professionals.

When asked about their preferred degree of interaction with financial professionals in a subsequent question, the vast majority of Delegator respondents in Figure 2 also indicate that they would prefer to delegate (although a few would prefer less delegation and more collaboration). (See green bars in Figure 3.) And Collaborators, too, overwhelmingly indicate that they would prefer to collaborate with professionals (see yellow bars in Figure 3). However, 15 million of the Self-Reliant households from Figure 2 (see the red-striped and yellow bars in Figure 3) would prefer greater collaboration with financial professionals.

Our extensive analysis of these self-reliant-who-want-more-collaboration households shows that they are quite different from other Self-Reliant households and from Collaborators. These households may be an overlooked market opportunity for the right financial institution and its intermediaries. For more information about the Self-Reliant-Who-Want-More-Collaboration households, contact CFD or request the MacroMonitor presentation on financial information and planning.

Implications of Job Trends

Because work plays such an important role in who we are, what we do, and how we earn the money to pay for our necessities and luxuries, nearly a third of the 30+ life events that the MacroMonitor measures relate to our jobs. The ten-year trends in the recent occurrences of these life events (happened in the past two years) reveal some interesting changes. For example, the incidence of people's changing employers in the past two years peaked in 2000 (at 21%) but has been declining ever since, to the current 13%. Apparently either people are not as eager to change their employment or employers are doing more to retain their employees than they were at the height of the market during the dot-com boom. The trend in recently receiving a job promotion exhibits a similar pattern, peaking at 12% in 2000 but declining to 7% in 2006.

The declines in the percentages of people recently receiving a promotion and changing employment clearly relate to the declines in incidences of recently having an income increase or decrease of more than 25%. However, incidences of changes in income have each remained level at 8% of all households since 2004. As a result of the market bust and recession of 2001, we see job losses and layoffs in the past two years increasing from 7% in 2000 to about 10% in 2002 and 2004, but this incidence has dropped back to 7% in 2006. The incidence of household heads' recently retiring crept up from 5% in 1998 to peak in 2002 at 7%, but has drifted down from there to 6% in 2006. This change is a mirror of the pattern of the trended incidence for people who recently started a business: at 4.5% in 1998, incidence went down to 3.4% in 2002 and is now back up at 4.4%. Fewer incidences of retirement and more business starts fit nicely with the Revolving Retirement theory.

Finally, the incidence of a household head's recently starting a first job declined significantly, from 3.4% in 2004 to 1.5% in 2006. The trends above together indicate that a pent-up demand for jobs or the propensity to change jobs frequently that grew during the 1990s has subsided in the 2000s. Put another way: Employees may be slightly less interested in job hopping, and employers increasingly may see value in retaining employees. Unemployment continues to remain fairly low, and with the Boomers in the preretirement life stages and entering into retirement, combined with the phenomenon of Extended Adolescents' delaying starting their careers, we may be entering into a period in which the premium on attracting and retaining experienced employees puts significant upward pressure on employees' salaries.