Who are reverse mortgages for?

As the Baby Boomer’s retire, an increase of advertisements offering “reverse mortgages” are hitting the airwaves, leaving homeowners (and their children) asking, “Is this a good idea for us?” Due to the ramifications of reverse mortgages, parents should never make these decisions alone without consulting the family who will have to finish the process upon their passing. Today we’ll break down what a reverse mortgage is, and who it might benefit.

“What Is a Reverse Mortgage?
In a word, a reverse mortgage is a loan.”

— Investopedia

A “reverse mortgage” s a financial agreement between the bank and the borrower in which a homeowner relinquishes equity in their home in exchange for regular payments, typically to supplement retirement income. It is in essence a mortgage but instead of receiving the full equity at one time and then paying the bank back over time, you receive the equity in small quantities over time, and pay the bank back at the end - and its that last part where homeowners need to know the dangers of a reverse mortgage.

A reverse mortgage may be a good idea for you if:

You are at least 62 years old

A homeowner must be at least 62 years old to qualify for a reverse mortgage.

You have enough money/energy to maintain your home throughout the remainder of yur natural life

As the homeowner, you will be expected to keep the home in good order over the course of the reverse mortgage. If you fail to keep the home and property up to local codes and the lenders standards, the lender will have the right to foreclose on the property and remove you from the home.

If you can’t afford to have someone else maintain your home, this means that you’ll need to do it yourself until the borrowers date of death.

You have enough money to pay the taxes on your home without the extra money.

Again, as the homeowner, the lender will expect you to pay the taxes associated with the property. If you do not, the lender again retains the right to foreclose on the property and remove you from the home.

You don’t have any heirs.

At the end of the term of the loan, the lender looks to the estate to fulfill the mortgage. Typically this means that the home is sold and the assets used to pay the debt. In the case of jumbo reverse mortgages, the estate may be liable for any shortfall in the debt.

You plan on being healthy and never leave the home until your date of death

Many reverse mortgages have a clause that allows the bank to foreclose if the homeowner is no longer residing at the home for a span of time - regardless of the reason - such as illness.

Sadly, we’ve seen more reverse mortgage foreclosures than we wish, and the story is always tragic. The family is left holding difficult decisions at the same time as the death or extended illness of a loved one. Be careful, there are many ways for a reverse mortgage to end poorly, and only one way for them to suceed - with the help of the whole family.

For more information:

https://www.wtae.com/article/investigation-finds-reverse-mortgages-can-be-risky/30029369

https://www.consumerfinance.gov/ask-cfpb/what-is-a-reverse-mortgage-en-224/

https://www.usatoday.com/in-depth/news/investigations/2019/12/18/reverse-mortgages-leave-families-battling-property-after-death/2597369001/

Greensburg 2022 Market in Review

The year 2022 was a year of historically low inventory and high demand, unlike anything Greensburg has seen in recent history. Interest rates have been a major player in the market this year and definitely caused some of the historic gains to cool off towards the last quarter of the year. As rates rose, activity slowed- at least to a certain extent. As you look through this report, you will notice that the rise in mortgage rates corresponds to other market data events.

 The annual median home sales price for all residential properties in Greensburg rose from $149,950 in 2021 to $173,450 in 2022 which is a 15.7% increase. Compare that to the year 2020 when the median sale price was $135,000 and the increase was at 11.1%.  In looking to this coming year, it is safe to say that these increases will cool down. To what degree will depend on mortgage interest rates, inflation, demand and market saturation.

The general trend in the median sale price over the past year has been increasing with the peaks in those increases showing up during the summer months.

The supply has been historically very low in 2022. The supply appears to have had a sharp increase towards the end of the year which is counter intuitive to cyclical seasonal historical data.

The marketing times (expressed in DOM- days on market) has also been extremely low. However, in the past few months, this has been rising due to a cooling in the market most likely attributed to seasonal cyclical events during winter months and compounded by the rising mortgage rates.

As is expected, the quantity of sales decreased in the last quarter of the year.

One point of data I was surprised to see pertains to the actual number of transactions year over year for the last 3 years. The years 2020 and 2021 had a high number of transactions with 2022 showing a slight drop off. This is conversely affected by the fact that with fewer transactions, there was a higher median sale price.  

The current number of active listings is also decreasing. We will have to wait a few months to see if this starts to increase when the market typically experiences seasonal cyclical events around March or April when sellers like to place their properties on the market.

Not only as demonstrated in the previous chart which showed the number of actives decreasing, the median list price is also decreasing. This could be significant to keep in mind. As the marketing times increase and the list prices decrease, this could have a direct impact on the median sale price going forward. Only time will tell how all of this will affect 2023 sales.

What Makes a Room a Bedroom?

This question is one of the most common questions I get and there is much confusion as to what qualifies a room as a bedroom. While there is no official definition, there is only one requirement a room needs in order to legally qualify it as a bedroom- a window of adequate size so as to allow for ingress/egress.

Most think a bedroom requires a closet which is a misnomer. There are plenty of older homes I have been in where the bedrooms don’t have closets. Think about it… there was a day when most people only owned a few articles of clothing. During these times, when there weren’t closets, many owned an armoire which doubled as a closet and dresser.

So lets put to rest that a bedroom NEEDS a closet.

With that in mind, in todays markets, most expect closets so that they have a place to store their clothing, shoes, bags and whatever else people put in their closets. Here are some other things to consider when classifying a room as a bedroom:

1. Is it of adequate size? A bedroom should be large enough to accommodate a bed and provide some space for movement around the bed, room for dressers, et.. The minimum size for a bedroom may vary depending on local building codes or regulations.

2. Is there a door? A bedroom should have a door that can be closed to provide privacy. A door can also be an added safety feature. It is best to sleep with your door closed in the event of a fire.

3. Where is the room in proximity to a bathroom? A bedroom should be located within close proximity to a bathroom. If all your bedrooms are on the 2nd level of the home and the only bathroom is on the first level, this could be viewed as a functional obsolescence. No one wants to get up in the middle of the night to stumble in the dark through the rest of the house.

These are the basic features that make a room a bedroom. The only feature that is a requirement is a window. However, depending on local building codes, there may be other requirements that a room must meet to be legally considered a bedroom and typically, the market might be expecting more.

Rear View Mirror or Crystal Ball?

Appraisals are a report that indicates an opinion of market value for a property. It is a reflection of what has been happening up until a certain point (our effective date) and not what is going to happen or might be continuing to happen.

What has happened could be different from what is going to happen. There is a place in real estate valuation for forecasting, but when completing appraisals for mortgage lending, divorce, estates, bankruptcy and listing work, we look at the sales and trends leading up to our effective date. Most often, our effective date is the day we look at the house, but there are times when our effective date is a retrospective look at a prior date such as a date of separation for marital dissolution purposes or date of death for estate purposes.

In any of these cases, the effective date that reflects the estimated market value is a culmination of the data analysis in the market leading up to that date. In other words, we are always looking in the rear view mirror to determine our opinion of value.

Over the past year, appraisers ran into situations where our rear view mirror was not equaling the rapidly changing markets. Houses were being listed and within less than 24 hours, sellers had multiple offers to choose from. Some of those offers included a percentage above the list price that seemed ludicrous, but buyers were desperate to get into a house and were getting discouraged by running into rejection after rejection so they were making very attractive offers. Inventory was low and this created the perfect storm. If you had cash and didn’t care about value, no problem. But if you needed a mortgage, the appraisal needed to reflect that it was worth what the buyer was willing to pay for it. In many instances, the history of sales did not make this possible. It either forced the buyer to bring the cash to the table to make up the difference or go back at the drawing board and start searching again.

Market value looks at how these actions between buyers and sellers have affected the climate in the market and use the sales that have closed as indicators of value for the property being appraised. It isn’t until you have an accumulation of data points that indicate buyers and sellers are reacting in concert that you have the ability to point to a changing market. In rapidly changing markets, it is challenging to correctly interpret the data and accurately reflect those changes. Those changes being reflected are not to be understood as an indicator that they will continue to happen, only that they have happened.

Times Are A-Changin'

Over the past couple months, there has been a shift in the market here in the Greensburg area of Westmoreland County. These changes are being affected by multiple factors such as the seasonal time of year that typically impacts real estate, the rise in interest rates and the need for the market to correct itself from the heightened activity over the past year. This shift was so pronounced in a recent appraisal I completed that I had to share it with you. Below is a graph that was taken from a work file for a property I have recently appraised. This is real time data. When you take a look at this graph, it clearly shows that the supply in the market has made a rapid rise within the past month and is starting to equal the Summer of 2020 and pre-Covid levels.

You might ask, “What does this mean?”. Well, I don’t have a crystal ball and am not in the business of being an economic forecaster- so the immediate answer is “I don’t know yet”. Only time will tell. However, just like the leaves are changing color indicating changes are coming, real estate data is starting to tell us that changes are possibly coming in the near future.

Keep updated with my blog. As soon as I have more information to pass along regarding marketing trends, I will pass it along to you.

Murrysville Year 2021 in Review

Last year, I relocated my business to Murrysville. It has been a pleasure to provide residential valuation services in an area that has so much to offer. As many have heard, read or experienced, the real estate market in the year 2021 was crazy. Houses would go up for sale and within a very short period of time, sometimes hours, multiple offers were received. Buyers were getting very aggressive with their offers, electing to forego all inspections, include escalation clauses and even include things such as free pizza dinners on Fridays for a year or Super Bowl tickets.

I decided to run the numbers on Murrysville as a whole and found that in the year 2021 there were a total of 267 recorded sales using a search of our local multiple listing service. These numbers do not include foreclosures or short sales. As an appraiser, we analyze what is going on in the market area. When doing this, we have to look at both the long term and short term activity in order to be able to recognize when there are changes happening in the market and how to best determine how this impacts value.

Murrysville Year 2021 Real Estate Sales Statistics

If you look at the general statistics of the area as a whole using simple regression, this shows that the year in review experienced a rising predominant sales price of about 1.3% per month.

Murrysville, 2021 Qtr 1

The moment you break down the sales prices into quarters, there are some very interesting results. The first quarter of the year had 59 sales which was the least number of transactions per quarter but was the only quarter that experienced an increase in predominant sales prices. Seasonally, the first and fourth quarters typically are the times of year with the least number of transactions, however, there were not the significant differences that we would typically find between the quarters. Quarter 2 had 78 sales, quarter 3 had 63 sales and the last quarter had 65 sales. More surprising is that the remaining 3 quarters experienced declines in the predominant sales prices.

Murrysville, 2021 Qtr 2

Murrysville, 2021 Qtr 3

Murrysville, 2021 Qtr 4

It is important to know that when determining the impact of what is going on in the market, statistics need to be analyzed specific to the area and specific to the time frame being impacted. Quarter 1 experienced a very significant increase in sales prices, quarter 2 was basically flat, quarter 3 had a reverse reaction by a notable decline with another decline in the 4th quarter but not as significant as the previous quarter.

The good news is that the declines of the last 2 quarters did not erase the overall trend of an increase from the beginning of the year. However, the last 2 quarters show that there could be a definite trend that is showing a cooling off and decline in the predominant sales prices.