RESPONDING TO THE HOUSING MARKET BUBBLE

We now know that the current housing dilemma that started in 2007 was not really a trend subject to full recovery – it was clearly a market bubble.  This means that in 2007, housing values were unrealistically high and the ability to now recover those inflated prices in the future is doubtful.

The current housing bubble seriously impacts the seniors housing industry in three ways: 1) the net home equity of seniors was never really worth the values that were indicated at the peak of the housing bubble, 2) seniors will likely continue to lose housing value for the next two to three years and 3) most seniors do not always focus on their true current cost of owning a home.  That is because they frequently forget about some important cost of living expenses when comparing the alternative homeownership costs with moving to an independent living or assisted living community.

Here are some non-monthly expenses frequently overlooked in this comparison: 1) homeowner’s insurance policy premiums, 2) real estate taxes paid annually, 3) repairs involving exterior and interior home maintenance, 4) landscaping, lawn care and in some markets snow removal, and 5) paying retail utility rates versus typically lower commercial rates incurred by senior living communities.  Home maintenance costs and real estate taxes can total up to $5,000 to $8,000 per year.

With these ongoing annual costs coupled with home values continuing to decline in most markets, a senior deciding to hold their home for the next five years can get very expensive.  A senior will likely continue to lose money because the housing value decline has not yet bottomed out.  Values are clearly not yet on a path to substantial recovery.

A seniors net worth and monthly cash flow has taken some heavy hits recently.  The returns on certificates of deposit and money market savings are earning less than 0.5% annually.  Savings portfolio assets involving common stocks have experienced significant volatility during the past three years.  It will certainly be difficult to consistently early 3% to 5% as was the case during the boom years.

Senior living sponsors and owner/operators must respond proactively during these challenging times.  We need to do a much more pragmatic job in communicating with seniors and their families that the worst is not over from a financial perspective.  Seniors will still see declines in their housing values, therefore, a strong case can be made for selling their home during these difficult times while also avoiding ongoing homeownership expenses.

There are two other major initiatives that progressive sponsors and owner/operators are pursuing.  Many are conducting occupancy enhancement initiatives with the objective to not only fill existing vacant units, but to compensate for increasing turnover.  There are a number of sales and marketing strategies that continue to work.  A common industry benchmark involves needing approximately 15 to 20 qualified leads to result in one move-in.  However, some successful operators are, in fact, experiencing move-ins with only 7 to 9 qualified leads or inquiries.  And that is net of turnover.

Others are compensating for modest declines in occupancy by sharpening their operations results.  For example, operating expenses for an 80-unit assisted living community might be somewhere in the range of $70 to $100 per resident-day depending on the community’s operational profile and the acuity levels of their residents.  If one could find just $1.00 per resident-day in expense reduction, this assisted living community operating at 90% occupancy, would realize a positive cash flow impact of over $26,000 per year. (80 units x 90% occupancy = 72 units times 365 days = 26,000 resident-days).  When operators realize that kind of cost savings is truly achievable, many increase their expense reduction initiatives to attempt to realize to $2 to $3 per day.  That means that their bottom line cash flow starts approaching an improvement of almost $80,000 per year.

Some astute operators are saying “a recession is a horrible thing to waste”.  This simply means that we need to use extraordinary efforts to sharpen our sales and marketing communications to residents and their families to enhance occupancy while sharpening operations by reducing expenses.