Tsunami of Boomer moves due to higher Standard Deduction?
Are tax reform and senior housing demand linked? Will the Trump Tax Reform’s dramatic increase in the standard deduction reduce over-65 homeownership? Is the mortgage interest deduction the deciding factor for when Boomers make “The Move” and downsize? If so, will the senior housing industry benefit? The senior housing industry thinks so. Or hopes so. We think that may be wishful thinking.
For the industry view see this article from Senior Housing Business, Tax Code Changes Could Boost Seniors Housing Occupancy Senior Housing Business speaks to developers, owners, and operators of senior living or retirement communities.
Senior Housing offers wide range of choice
Senior may not be boomer’s preferred label, but senior housing is the established lingo that encompasses a wide range of where to live choices, including:
- 55+ golf communities
- age-restricted rental apartments
- independent living apartments;
- comprehensive Continuing Care Retirement Communities (CCRCs)
- memory care
- and even traditional nursing homes or long-term care.
That’s like fifty-years of potential options with so many living to more than one-hundred. Baby boomers are still mostly in their 60s and 50s. The oldest boomers are now turning 72. (1946-2018) Collectively we’re mostly on the relatively active and independent end of the senior housing spectrum.
But with the experience of elderly parents and older friends, we’re increasingly aware of the range of options. Not always ready to think about them. But we’re aware. We will share the most common advice we hear from those who went before, “We should have moved sooner.”
Senior Housing’s Worrying Reality
Aging With Freedom covers the senior housing from the consumer viewpoint. We also cover other challenges as we write our Third Act. Senior housing is in a rush to build new units in anticipation of all those retiring baby boomers. Like us. But are boomers retiring to senior housing communities? So far, no. Not so much.
That’s why the industry hopes tax reform and senior housing demand go together like bread and butter.
The industry is projecting forward the behavior of prior generations. The reality is different than the past. Numbers tell the tale. Occupancy rates are steadily declining. The Cap Rate (return on investment) in senior housing is falling. Average age for move-in? Rising. And average occupant age? Also rising. People are waiting later and later to move. Labor shortages are driving up operating costs. There are individual communities that are exceptions to the rule.
Aging With Freedom’s mission includes looking for the best of the best in where and how to live in retirement. Evidence suggests the future may be less focused on age-segregated housing. Boomers want more integration into and with the surrounding community. See, Active Destination Senior Living. More on multi-generational housing another day. We’ll dissect tax reform’s impact today.
Tax Reform – Simplification via Doubling the Standard Deduction
Tax reform takes full effect for 2018 tax returns. The standard deduction doubles to $12,000 filing single or $24,000 filing jointly. The standard deduction reduces taxable income by a factor of your tax rate. Tax reform also reduces tax rates for most taxpayers.
This is a far bigger financial benefit and simplification compared to the historic itemized deductions. But in a change from past practice, you can’t use the standard deduction and the deduction for mortgage interest (or charitable donations). It’s one or the other.
Most people will benefit more from the standard deduction. This decouples mortgage interest from annual tax preparation considerations for most taxpayers.
This also reduces the pressure for younger taxpayers to buy. We’re less convinced it will matter to existing boomer homeowners as to when they choose to sell. For the senior housing industry’s hopes to come true? Taxpayers must use this new freedom from tax complexity to choose to downsize and relocate sooner in retirement.
Here’s a test. You hear, “I get to keep more of my money at tax time.” Do you jump to, “Time to sell the house?” That’s a long logical leap.
Aging-In-Pace vs. “The Move” and Entry to Senior Housing
Aging-in-Place is a strong trend for retirees. Inertia favors staying put. There’s all the emotional involvement with our home. And there’s the perceived security of owning a valuable, real asset. It’s not just driven by the mortgage tax deduction. In fact, the historic objective was always to have the mortgage paid off in retirement. (More on that in a moment.) And if you follow Granddad’s advice, the mortgage interest deduction is moot.
But, as we point out elsewhere, you can’t eat the house. Read our prior article here, You Can’t Eat the House. Boomers have a large share of their wealth tied up in their homes. At some point, retirees must get the cash out to use it for other priorities like eating and health care. Oh, yeah. Housing isn’t the only necessity.
There are only three real choices:
- Sell and Downsize or GEOarbitrage – move someplace less expensive. When you move, your destination may be a rental or require a buy-in. But given the reason to move, it’s got to be less, and not more expensive. Trading Places – GEOarbitrage for retirement wealth
- Mortgage/Second-mortgage – pay to use your own money. (Personal Finance Hint. This is burning assets not living off of income generated by the assets.)
- Reverse-mortgage – pay through the nose to use your own money. In this low-interest rate environment, all the upside is with the reverse-mortgage lender.
Boomer debt limits Senior Housing demand
In recent years, second mortgage debt is climbing, even for those in their 50s and 60s, either approaching or in retirement. The New York Times summarizes the data here. They’re Growing Older. Their Mortgage Debt Is Growing Deeper.
We’re not sure boomers can kick their debt addiction. But they should. We’re debt free and love the resulting financial freedom.
Unfortunately, boomer’s debt habit is pretty ingrained, even without tax incentives. That debt is a barrier to choosing almost any senior housing option.
Not when. But maybe Rent over Buy-in?
The Senior housing industry only benefits if the choice is, “Sell!” And sell sooner than boomers would have sold before tax reform. And senior housing has to offer options less expensive than current homes.
This runs counter to historic pricing models where the industry assumed new entrants would essentially swap the big suburban home for a senior unit in the same price range. And “The Move” further requires the addition of significantly increased monthly service fees. If you’re selling to improve access to cash and cash flow, that pricing formula doesn’t work. That dog won’t hunt.
Other pressures determine when to sell more strongly than tax reform’s reduced mortgage interest deduction incentives.
Tax Reform may influence peoples’ choice between rent versus buy. Millennials may choose to delay purchase and continue renting. Similarly, when Boomers do sell and downsize, they may prefer renting over buying. That’s bad news for Continuing Care Retirement Communities (CCRCs) or other buy-in style senior communities.
It’s the Cash Flow (not the tax deduction)
But this link to mortgage interest isn’t strong. Seniors in CCRC’s? They don’t get the benefit of the mortgage interest deduction before or now. The real estate developer did and does. Just as in rental housing. Businesses still get to deduct financing from their gross income. It’s a business expense.
The trend to rental is a function of boomer’s comparatively poor average retirement savings. If cash flow is the issue, downsizing and rentals are the answers.
Buy-in CCRCs are all chasing the top tier of income and wealth. Rentals’ comparatively lower monthly fees are the incentive to rent. And not the mortgage interest deduction. Or deductibility of pre-paid health expenses.
There are some boomers who can play under the old rules. The rich ones. But can all the new and existing senior housing communities win a race to the top? And survive? No. Most senior housing communities must change to play by the new reality. Not all boomers are rich. And not even all rich boomers want the traditional senior housing deal. Adapt.
One potential adaption? More emphasis on off-campus services like CCRC At Home or self-help village programs.
Want evidence? The recent creditor-forced bankruptcy of The Ranch in Stillwater, Oklahoma was the result of market resistance to high entry fees. Stillwater is a relatively wealthy university community. Buyers stayed away in droves. The old numbers didn’t work in practice. (Pun intended.) The mostly done development wanted to lower entry fees, but bondholders said no. Problems with Ranch CCRC Stillwater OK : Retirement center scheduled to open in Stillwater now in foreclosure
Tax reform is not the driver shaping the future of senior housing or the choices baby boomers are making about where to live in retirement. When to make “The Move?” is rarely a tax-planning decision. The downsize decision is emotion-laden. The move is often triggered by a health crisis or a cash crunch. It’s a stretch to think, “I can’t deduct mortgage interest anymore,” will be the deciding trigger. Boomers are not going to flood into senior housing as a result of tax reform. Tax reform and senior housing? Not the obvious answer to, “I get to keep more of the money I earn.”