Looking at Planning Opportunities in Today's Housing Market
Shelter, a general necessity of life, has yielded impressive gains over the recent past. Home prices in major metropolitan areas are up an average of 18.6% over the 12 months ending in June (as measured by S&P CoreLogic Case-Shiller National Home Price Index). Driving this increase is a continuation of multiple trends, including low interest rates, a shortage of homes for sale, lack of new homes being built, and the eviction moratorium. Like toilet paper during the pandemic’s early days, we are dealing with a serious housing supply shortage.
With home prices advancing so quickly, concerns may arise that we are in another housing bubble. Fortunately for homeowners, the conditions that produced the housing bubble in the mid-2000s are quite different than the conditions today. For example, credit scores of buyers are significantly higher now than during the bubble, and mortgage debt as a percentage of income is close to half what it was then. This means home buyers are well qualified and have the means to pay for their mortgage.
While the price of homes has jumped materially in the recent past, it is wise not to expect gains as strong as this to continue. Consider, for example, that the average annualized gain in home prices (measured by the index mentioned above) from 1987 to June 2021 was 4.2%. More moderate increases are what we are accustomed to and what we should likely expect going forward. However, given the increased value of many of our homes, a number of planning opportunities may present themselves. To that end, here are some items to think about given today’s housing market:
1. Refinance: Despite hearing that rates have been near historic lows for a few years, there is still a chance to refinance. BankRate reports that 38% of mortgage holders don’t know their interest rate. Ignorance is not bliss when it comes to our finances, so talk with your financial advisor and mortgage professional about a mortgage review. There are many different finance options available that may help you reduce the overall interest expense, reduce monthly payments, or both. And with home prices elevated, your home may have a more attractive loan-to-value ratio, potentially opening the door to lower mortgage rates.
2. Reverse Mortgage: Depending on your personal circumstances, you may need additional funds for retirement, medical costs or other expenses. The equity you have in your home can be used to help cover some of these expenses (without selling your house). If you are 62 or older you may be able to borrow money using a reverse mortgage. Reverse mortgages are like traditional mortgages, but with the cash flow reversed. Instead of making monthly payments to a bank, you could have a bank pay you monthly or get a large payment up front. Most reverse mortgages get paid off when the home is sold. While the cost of a reverse mortgage has come down over the years, they may be more expensive or have higher interest rates than other forms of borrowing. However, in the right circumstances, a reverse mortgage could be a great solution for your cash needs. We can help you navigate the options and put you in touch with a specialist.
3. Home Equity Line of Credit (HELOC): Home equity lines are an option for anyone that wants to access the value they have in their home. Unlike a reverse mortgage HELOCs have no age requirements, but they do come with monthly interest payments (and some also require monthly principal payments) the borrower will need to make on the amount they borrow. HELOCs don’t have to be used all at once, so they can act as an emergency fund, help cover home improvements, or finance a large purchase like a car.
Your home has likely been more to you than just a place to live, and perhaps it’s even been a good investment. Not only does it provide you shelter, it could potentially help you realize your financial goals. Reach out to us if you would like help to determine the role your home can play in your financial plan.