The Proprietary Product Market
Are Older and Wealthier Americans Averse to Holding Household Debt?
By Edward Seiler
The introduction of a new menu of proprietary reverse mortgage options will necessitate a shift in traditional marketing strategy towards a wealthier generation of older homeowners who are predisposed to hold debt. We have all heard that an obstacle to expanding reverse mortgage volume has been an anecdotal aversion among some of those whom Tom Brokaw has labeled “the Greatest Generation” to household debt. However, to those who have spent their working lives toiling to pay off their mortgages, debt is just another four-letter word.
But does evidence prove this? Is there an aversion to debt among the 75+ generation? If so, is the debt aversion of the generation that grew up in the shadow of the Great Depression also ingrained in the Baby Boomers’ psyche? After all, Boomers, who grew up in the postwar high, are the wealthiest American generation. Ever optimistic, Boomers are often seen as excessive consumers willing to take on debt.
Is there a market for proprietary products? Who are the likely borrowers? And, can these products lead to the industry growth aging demographics have indicated and lenders have anticipated?
To answer these questions, it helps us to examine home-secured debt trends and borrowing patterns among older Americans at different ages and wealth levels.
One of the main lessons from the Great Recession is that a deeper understanding of household debt—including home mortgages, home equity loans, auto loans, credit card debt and student loans—is critical. While a sharp increase in household debt may seem to indicate to some a severe upcoming recession, debt is actually one of the most important ways of financing economic progress. Debt is the lubricant of the economic machine and many Americans’ wealth was made possible by its availability. So only by fully understanding debt behavior can we know if prevailing debt levels and trends are manageable.
Household debt has increased by more than $2.1 trillion in the last five years and reached a record $13.3 trillion in the second quarter of 2018. Despite this growth, aggregate delinquency rates (driven by strong mortgage and home equity loan performance) continue to improve, and only three percent of loans were 90-days or more delinquent as of 2018 Q2. While other types of household debt (especially student and auto loans) are raising red flags, it appears that current home-secured debt levels do not pose an excessive risk.
With that point settled, we can now turn to home-secured debt holding and patterns among older and wealthier Americans. Considering home-secured debt accounts for almost three-quarters of household debt balances, and since the population aged 75 and over will almost double in the next twenty years, seniors’ debt behavior is central to the economy and, of course, an indicator of the market for proprietary products.
Observations of Older Americans Debt Behavior
Boomers are ever optimistic, but do they have room to take on additional home-secured debt?
The opportunities for seniors to take on additional debt is neatly summarized in the quarterly National Reverse Mortgage Lenders Association/RiskSpan Reverse Mortgage Market Index (RMMI). The RMMI has tracked reverse mortgage market opportunity since 2000 by analyzing and reporting on trends in senior home values and home equity levels. The most recent RMMI, published in September, hit an all-time high at 249.37 and reflects record senior home equity of $6.9 trillion. So there is significant home-secured debt available.
Opportunities thus exist, but beyond anecdotal evidence, are seniors inclined to tap this equity?
Seniors aged 75 and older are not averse to holding debt. Indeed, they are two-and-a-half times more likely to hold debt than they did a quarter of a century ago and are four times more likely to hold home-secured debt. Moreover, the mean levels of debt held by (debt holding) seniors has tripled (in real terms) and home-secured debt has increased by over 140 percent over the same period.
And, what about wealthy Americans who make up the market for proprietary products? Are they also disposed to hold home-secured debt?
Yes, high-income families are also disposed to holding debt: More than 80 percent of them hold any debt, and approximately 70 percent have home-secured debt. Moreover, the mean levels of home-secured debt held by high-income families has doubled (in real terms) since 1989.
Household Debt: By Age of the Head of the Household
Except for the Great Recession and its aftermath, the proportion of households holding debt has gently trended upwards since 1989 (red line in the left panel of Figure 1). The fraction of households with debt rose to a new high of 77 percent in 2016, and based on 2018 New York Federal Reserve data, this increase continues.
A striking feature of the left panel of Figure 1 is the growth in the proportion of older Americans holding debt: Over 70 percent of households headed by a person aged 65 to 74 held debt in 2016 (up from 50 percent in 1989), and half of the households with heads aged 75 or older held debt in 2016 (two and a half times as many as in 1989).
Though the fraction of families with debt rose between 2013 and 2016, the mean value of the debt (for those households holding debt) fell slightly from $126,000 in 2013 to $123,000 in 2016 (Figure 1, red line in right panel). Since 2007, a deleveraging pattern is also apparent for households headed by 65- to 74-year-olds. Meanwhile, the oldest 75+ age group has displayed a more idiosyncratic pattern. While their mean debt levels have yo-yoed from survey to survey, there is a clear upward trend (dashed blue line) and their mean debt levels have tripled in real terms from 1989 to 2016.
By Family Income
High-income households utilize debt extensively: Over 80 percent of households in the top income decile have consistently held debt and approximately 90 percent of households in the second income decile have done so.
Moreover, the mean value of debt held by high-income households has more than doubled (in real terms) since 1989: The debt for the top decile was $402,000 in 2016 (versus $191,000 in 1989) and was $199,000 for second income decile families in 2016 versus $96,000 in 1989.
Table 1 summarizes primary residence assets and debt by household income and by the age of the head of the household. The table, constructed using 2010 to 2016 Survey of Consumer Finances data, contains rich information on homeownership rates, property values and debt.
The table shows (among other things) that:
- Although homeownership rates fell to 64 percent in 2016, the mean value of owned homes rebounded to over $300,000.
- Homeownership rates increase with household income, as do the mean values of the homes.
- Homeownership rates also increased with age in 2016, although the relationship between the two top age groups flipped from 2013 to 2016.
- Property values for owned homes increase with age up to the 55 to 64 age group. They then fall.
- Over two-thirds of richer households hold debt on primary residences.
- The proportion of older households with debt on their primary residence jumped from 20 percent in 2013 to 27 percent in 2016. The value of the debt remained relatively constant.
Although the proportion of households with home-secured debt and the mean value of that debt has fallen since 2007 (red lines in Figure 2), older households display an upward trend over this period (look at the darker blue line in Figure 2). Moreover, the percent of age 75+ households with home-secured debt more than quadrupled between 1989 and 2016 and the mean value of debt (for those holding debt) increased by over 140 percent.
Although Table 1 shows that the mean value of home-secured debt fell between 2010 and 2016 for higher income households, the longer-term trends, shown in Figure 3, indicate that the real value of home-secured debt doubled between 1989 and 2016 for the top two income deciles (gray and brown lines).
The news is good. If we pursue a clear understanding of seniors’ economic behavior and how it is evolving, evidence shows that both Boomers and those older than them, as well as higher-income households, are not averse to taking advantage of opportunities to hold debt. Holding debt has been steadily expanding among the potential proprietary product borrowers. It appears to be ingrained in their financial behavior patterns. Consequently, as an industry, we have the chance to make their senior years better by providing apt reverse mortgage loan products.