Americans Still Believe Real Estate is Best Long-Term Investment

Americans Still Believe Real Estate is Best Long-Term Investment | MyKCM

According to Bankrate’s latest Financial Security Index Poll, Americans who have money to set aside for the next 10 years would rather invest in real estate than any other type of investment.

Bankrate asked Americans to answer the following question:

“What is the best way to invest money you wouldn’t need for 10 years or more?”

Real Estate came in as the top choice with 28% of all respondents (3% higher than last year), while cash investments – such as savings accounts and CD’s – came in second with 23% (the same as last year). The chart below shows the full results:

Americans Still Believe Real Estate is Best Long-Term Investment | MyKCM

The article points out several reasons for these results:

“After bottoming out at the end of 2011 following the worst housing collapse in generations, home prices have gone gangbusters recently, climbing back above their record pre-crisis levels. Prices jumped 6.6 percent during the 12 months that ended in May, according to CoreLogic.

Toss in persistently low interest rates, tax goodies that come with owning a mortgage, and the psychological payoff from planting your roots, and maybe it’s no wonder real estate remains popular.”

The article also revealed that:

“Bankrate’s Financial Security Index — based on survey questions about how people feel about their debt, savings, net worth, job security and overall financial situation — has hit its third-highest level since the poll’s inception in December 2010.”

Bottom Line

We have often written about the financial and non-financial reasons homeownership makes sense. It is nice to see that Americans still believe in homeownership as the best investment.

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How Long Do Families Stay in a Home?

How Long Do Families Stay in a Home? | MyKCM

The National Association of Realtors (NAR) keeps historic data on many aspects of homeownership. One of the data points that has changed dramatically is the median tenure of a family in a home. As the graph below shows, for over twenty years (1985-2008), the median tenure averaged exactly six years. However, since 2008, that average is almost nine years – an increase of almost 50%.

How Long Do Families Stay in a Home? | MyKCM

Why the dramatic increase?

The reasons for this change are plentiful. The top two reasons are:

  1. The fall in home prices during the housing crisis left many homeowners in a negative equity situation (where their home was worth less than the mortgage on the property).
  2. The uncertainty of the economy made some homeowners much more fiscally conservative about making a move.

However, with home prices rising dramatically over the last several years, over 90% of homes with a mortgage are now in a positive equity situation with 70% of them having at least 20% equity.

And, with the economy coming back and wages starting to increase, many homeowners are in a much better financial situation than they were just a few short years ago.

What does this mean for housing?

Many believe that a large portion of homeowners are not in a house that is best for their current family circumstances. They could be baby boomers living in an empty, four-bedroom colonial, or a millennial couple planning to start a family that currently lives in a one-bedroom condo.

These homeowners are ready to make a move. Since the lack of housing inventory is a major challenge in the current housing market, this could be great news.

HOW TO TRADE-UP (OR DOWN) USING A REVERSE MORTGAGE

Houses on stacks of coins and calculator on dollar bills

Home prices in many markets have gone up recently.  This is leaving many retirees with sticker shock when it comes to trading up, or even trading down.

Consider Anna and Olaf who are in the process of selling their $400,000 home.  They’ll be left with net proceeds of approx. $364,000 after paying 9% in sales expenses (transfer taxes, real estate commissions, etc.).  The new house they want to purchase costs $500,000, leaving them $136,000 short.

  • Option 1: sell or liquidate $136,000 worth of investments or retirement assets. They will need to “gross up” the withdrawal for taxes if the funds are in a taxable account such as a conventional 401(k).  Assuming a 25% tax bracket, they will actually need to withdraw $181,333 from the account, pay their 25% income taxes, and walk away with net proceeds of $136,000.  Ouch!
  • Option 2: use a $136,000 Home Equity Conversion Mortgage (HECM), also known as a “reverse mortgage”. In this case, there would be no monthly mortgage payment.  Anna and Olaf could preserve their retirement assets and buy their new home without any impact on their cash flow.

Please contact me for more information or if you’d like for me to run the numbers for your situation.

Baby Boomers Are On the Move

Baby Boomers Are On the Move | My KCM

According to a Merrill Lynch study“an estimated 4.2 million retirees moved into a new home last year alone.” Two-thirds of retirees say that they are likely to move at least once during retirement.

As one participant in the study stated:

“In retirement, you have the chance to live anywhere you want. Or you can just stay where you are. There hasn’t been another time in life when we’ve had that kind of freedom.”

The top reason to relocate cited was “wanting to be closer to family” at 29%, a close second was “wanting to reduce home expenses”at 26%.

A recent Freddie Mac study found similar results, as “nearly 20 percent of Boomers said they would move closer to their grandchildren/children compared to 13 percent who said they would move to a warmer climate.”

Not Every Baby Boomer Downsizes

There is a common misconception that as retirees find themselves with fewer children at home, they will instantly desire a smaller home to maintain. While that may be the case for half of those surveyed, the study found that three in ten decide to actually upsize to a larger home.

Some choose to buy a home in a desirable destination with extra space for large family vacations, reunions, extended visits, or to allow other family members to move in with them. According to Merrill Lynch:

“Retirees often find their homes become places for family to come together and reconnect, particularly during holidays or summer vacations.”

Bottom Line

If your housing needs have changed, or are about to change, let’s get together to discuss your next steps.

Retirement Timing

time-money.jpg

A lot of discussion about “sequencing of distributions” has been taking place recently in financial planning circles.  “Sequencing of Distributions” looks at the order in which you take distributions from your retirement account.  This matters because the order in which you take distributions has a very significant impact on how long your retirement assets will last.

Consider the two examples illustrated in the chart.  Column 1 has the same amount of distributions scheduled for the next five years, regardless of how the market performs.  Column 2 changes the amount of distributions in years 2, 3 and 4, based on the performance of the market.

A reverse mortgage line of credit can be used to supplement your income in the years where you take a reduced distribution from your retirement account.  This could preserve your assets for a longer period of time, and give you more flexibility as the market fluctuates.

Please see a financial advisor for more details on how to evaluate a better distribution sequencing strategy for your situation.  Please contact me for more details on how a reverse mortgage could help.

2015 IRA Contribution

IT’S NOT TOO LATE FOR A 2015 IRA CONTRIBUTION

Don’t forget that you have until April 18, 2016 to contribute to your 2015 IRA. The contribution limit this year is:

  • $5,500 ($6,500 if you’re age 50 or older), or
  • Your taxable compensation for the year, if your compensation was less than this dollar limit.

The IRA contribution limit doesn’t apply to rollover contributions or qualified reservist payments.  Click here to visit the IRS web site for details.