Elders’ Homes Have Lower Values

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Do elderly homeowners’ properties increase in value at the same rate as other houses? To answer this important question, HUD’s Office of Policy Development and Research has published a study that examines the relationship between an owner’s age and their house’s gain in value. The study’s findings could affect projections about the value of many seniors’ largest asset — their home.

The Need for Accurate Assessment

Elderly owners, especially those with limited incomes and assets, need reliable information to help them plan for their financial future. Others, such as researchers, real estate agents, and financial advisers, also need accurate data about seniors’ house values. Sons and daughters want to ensure that their parents will have sufficient resources to provide for themselves, while local governments depend on property taxes optimally linked to rising home values. Cities and towns must provide social services for seniors who choose to age in place. Both families and local governments have a stake in preserving elderly-owned properties as a source of affordable housing for the next generation of homebuyers.

The federal government also benefits from having accurate assessments of elders’ house values. Through the Home Equity Conversion Mortgage (HECM) program, the Federal Housing Administration (FHA) insures reverse mortgages, which allow elderly homeowners to convert their home equity into cash. The homeowners need not pay off the reverse mortgage loan until they move or permanently leave their home, when it’s sold to pay off the loan balance. The long-run viability of the insurance fund set up for these mortgages depends on projected house values exceeding the total loan balance. Because these loans can extend for 20 years or more, the government must make realistic assumptions about house price appreciation over long periods.

An Appreciation Lag: Why?

Ordinarily, one might assume that elderly owners’ houses would appreciate at approximately 1.8 percent a year, the current national average for all homes over the long run, but the study finds that this is not usually the case. Based on current data, the house value appreciation rate for elderly homeowners is 1 to 3 percentage points lower than the national average. What could explain this disparity? The HUD study finds six likely explanations, none of which is definitive and all of which need more research. It may be that one or several of these theories, summarized below, explain the appreciation lag.

Out of Style and Inadequately Maintained

Elderly owners have health needs and other financial and personal priorities that may leave little money and energy left over for housing matters. As a result, the homes of elderly owners may be out of style and poorly maintained. Inadequately maintained and unremodeled homes have lower values than do newer homes that are more appealing to buyers.

Owner Intent

Another explanation pertains to the motives of the two types of homeowners — “movers” versus “stayers.” Movers maintain and improve their homes because they intend to sell them and want to get a good price. Stayers plan to stay in their homes as long as possible. Beyond the age of 70 to 75 years, stayers tend to subtract value from their home by minimizing housing expenses and by not making improvements. They like their home the way it is and do not plan to sell.

Elastic Market Supply

Many retirees move to the Sun Belt or to rural areas seeking lower housing costs and a better environment. The housing markets in these destinations offer an opportunity to avoid high-priced land in or near employment centers. Thus, elderly owners can buy property with fewer regulations, where new construction is easier and less expensive. The only disadvantage is that over time, the housing supply keeps up with new demand and, therefore, the house values of elderly owners do not appreciate at the same rate as properties in areas where the supply is less elastic.

Tenure and Building Age

A new HUD study examines potential reasons for low housing value appreciation rates among elderly homeowners.

The elderly tend to live in the same house for a long time. Lower appreciation rates for their house values are related to the depreciation associated with older homes.

Downward Bias

Variance in house values increases with age. Owners may reduce the self-reported value because they are uncertain about its market value in light of its age. Buyers and appraisers may also discount atypical units that have aged with character.

Lack of Market Awareness

Elderly owners who have not bought or sold a house in many years may not be good judges of the current market value of their homes. Some owners may even lack the mental capacity to provide an accurate assessment.

From the findings of this HUD study, the most obviously useful federal policy change would be to adjust the expected recovery from house sales under the FHA’s HECM program. Local governments could assist elderly citizens aging in their own homes by offering maintenance loans and deferring their property taxes until they leave their houses. In addition, cities could lower property taxes to more accurately reflect a home’s condition.

The complete report, The Relationship Between Homeowner Age and House Price Appreciation, is available at no cost at www.huduser.org/publications/hsgfin/rhaha.html. Readers interested in developments in elderly housing might also be interested in Elderly Housing Consumption: Historical Patterns and Projected Trends at www.huduser.org/datasets/ahs/Elderly_Housing_Consumption.pdf.