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real estate boom

Real Estate is Booming? Is a Bust Ahead?

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Anyone looking to buy or sell a home lately has probably been hit by sticker shock. Residential real estate prices have gone through the roof, increasing at rates unseen since 2005. According to S&P Case-Shiller, home prices in March saw their highest annual rate of growth in over 15 years — up 13.2% from a year earlier, following a 12.0% annual gain in February. Some markets — most notably Phoenix, San Diego, and Seattle — saw gains of 18% to 20%.1 What’s more, the median price of a new home sold in April was $372,400, up 20.1% from a year earlier, the strongest annual gain since 1988.2

Bidding wars are now common, and in some neighborhoods, competition is so fierce that many homes are sold before they even hit the market. According to Zillow, nearly half of the people who sold homes in April accepted an offer within a week.3

What’s Behind the Surge

Several different factors are driving the frenzy. For one, mortgage rates remain historically low. Although they have crept up some since their all-time low in January, the rate on a 30-year conventional mortgage was just 2.93% as of June 27.4 That means that anyone looking to spend a fixed amount per month on a mortgage can now afford much more house than they could a few years ago.

There are also demographic factors at work. Millennials, who, as a group, have long shunned buying in favor of renting, are now entering the market in force. COVID-19 and the prospect of long-term telecommuting have encouraged many to move from urban apartments to suburban homes. Many others are transitioning into larger homes to accommodate families.

Perhaps the biggest reason for the current spike in prices is supply — or lack thereof. The inventory of new houses has been sharply constricted by a widespread lumber shortage, along with shortages of kitchen appliances and other building supplies, such as copper and PVC pipe. Transportation logjams, brought on in part by COVID lockdowns and business closures, continue to impact new home construction. This has put pressure on the overall inventory of existing homes as well, as would-be buyers of new homes opt for existing homes instead. Although existing home sales are up year-to-date, they dropped in April for the third consecutive month, according to the National Association of Realtors.5

Will it continue?

Although the current supply shortage shows no signs of abating, over time, the bottlenecks will likely work their way out, as the post-COVID economy kicks into gear. Price appreciation is unlikely to continue at its current heady pace, but most real estate analysts do not foresee any major price drop, as happened back in 2006 to 2012 when overbuilding and lax lending standards posed more fundamental issues. The bigger concern may be mortgage rates. Average rates remain below 3%, but that could change if inflation prompts the Federal Reserve to raise interest rates. The Fed has indicated that it intends to hold rates steady for the time being, but should inflation continue at its recently reported level of over 4%, it will likely take action. Should that happen, mortgage rates would rise and real estate demand would cool down.

So stay tuned, but be prepared for more of the same in the immediate future.

Notes:

1S&P Dow Jones Indices, S&P Corelogic Case-Shiller Index Shows Annual Home Price Gains Climbed to 13.2% in March, May, 25, 20121.

2Source: Wall Street Journal, U.S. Home-Price Growth Surges as Demand Overwhelms Supply, May 25, 2021, based on figures released by the Commerce Department.

3Source: NBC News, It’s a red-hot real estate market — so why are home sales plunging?, May 22, 2021

4Source: Freddie Mac, as of June 17, 2021.

5National Association of Realtors, Existing Home Sales, May 27, 2021.

 

                                                                                                                                                                            

This material was prepared by LPL Financial. This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that they views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change. All performance referenced is historical and is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly.

 

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

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Should I downsize or move in retirement?

Housing Decisions in Retirement

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How Housing Figures Into Planning For A Longer Retirement

As featured in the Winter 2017 issue of Westchester Senior Voice magazine

In my work as a CERTIFIED FINANCIAL PLANNER™ professional, I always discuss the topic of housing with my clients as they plan for retirement. Since, according to the U.S. Bureau of Labor Statistics*, housing costs are the single largest expense for every age group – whether you’re 50, 60, 70 or older, we need to consider what makes sense as we approach, or are already in, the retirement years.

Evaluating housing costs is especially important given the fact that we are living longer and we may need to support an extended retirement. In Westchester County, we are also subject to the higher insurance costs, maintenance costs, and property taxes that come with higher home values. Certainly, if you’re still in your working years, paying off any remaining mortgage debt should be a priority.

Most people want to stay in their homes throughout retirement, but haven’t thought about all the costs involved. We may need to renovate to maintain our home’s value, household tasks may become more difficult – requiring the need to hire outside help, and we also have to consider modifications to keep our homes safe and compatible with our changing needs as we age.

Reevaluating your priorities may help you create the means to support a more fulfilling retirement. If you’re concerned about maintaining your lifestyle in retirement, given the potentially increasing costs of staying in your home, the rest of this article is for you.

The good news is there are plenty of options, especially when you consider that lowering your monthly expenses in retirement can be just as effective as an increase in income. One possibility, which may be difficult – but necessary – to consider is selling the family home.

For most of us, it’s not an easy decision to sell the home where we’ve created a lifetime of memories. But if you can get past that, the financial benefits could be considerable. Start with trading in those heating and lawn maintenance bills…and how about property taxes!

Selling your home and downsizing to a smaller one may not only lower your expenses, but could actually increase your income: the added liquidity from the home sale could be reinvested into a portfolio that could provide additional income.

Another option that may enable you to better afford your housing costs is to rent out extra space. Also, consider that home ownership is not always the best option for empty nesters. Housing decisions should take into account other factors: perhaps a move to a better climate or being closer to adult children and grandkids. Renting, for instance, allows you to test out a new community before you decide to purchase, and can save you unwanted costs in the future if you realize you made the wrong choice.

Whether you decide to buy or rent your next home, your objective should be to do it on your own terms: before a financial situation dictates the move. When choosing your next home, consider how you will maintain or build a strong social network and be able to do the things you enjoy. Having easy access to health care, dining, and the activities you enjoy are all important considerations. If a car is a necessity, what will you do if driving is no longer an option? The Westchester County legislature’s recent decision to allow ride hailing services, like Uber and Lyft, may make getting around easier and less expensive.

Being able to envision what will be important to you in a home during retirement and having a better idea of what your housing expenses might be is an important first step in planning for a successful retirement. Take the initiative and speak with a qualified professional who can assist you with your plan.

 

*Consumer Expenditure Survey, 2014, https://www.bls.gov/opub/btn/volume-5/spending-patterns-of-older-americans.htm

Securities offered through LPL Financial, Member of FINRA/SIPC and investment advice offered through Stratos Wealth Partners Ltd., a Registered Investment Advisor. Stratos Wealth Partners, Ltd. and Lob Planning Group are separate entities from LPL Financial.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

 

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