During my 34 years in practice as a Certified Financial Planner®, and from the time I graduated the United States Air Force Academy, I was always of the mindset that young people starting out in life should immediately, or as soon as financially possible, acquire an affordable home. Because of this entrenched belief, our firm has historically recommended our client’s children, and grandchildren, buy a home as early in their careers as possible. No more.

Many economic dislocation events have occurred due to COVID-19. Our firm has taken advantage of those events by putting our client’s monies in front of companies that have benefited from those policy mistakes and, as a result, our clients have realized significant and above-average market appreciation. Another economic dislocation event is now being realized. That is because irrational, unscientific COVID-19 policies, including business/education lockdowns, drove real estate prices through the roof as people tried to secure primary residences, especially coastal or mountainous properties, away from the worst affected urban areas. The increased demand for housing caused home prices to skyrocket over the last 18 months.

Coincident with this, the Federal Reserve has printed trillions of dollars over the last year and a half, and used those dollars to buy bonds in the open market, in order to drive down interest rates. That tactic, called quantitative easing, worked well and resulted in the lowest interest rates in the history of our country. Lower interest rates made it much easier for individuals to qualify for mortgages and purchase properties. Lower rates meant lowered home payments and pushed the already skyrocketing price of residential real estate. Tight inventories resulted from the flight from urban city centers to the suburbs and also caused a 25% surge in home prices from June of 2020 to June of 2021, according to David Rosenberg, chief economist and strategist at Toronto-based Rosenberg Research.

This short-term explosion in the price of homes has created another economic dislocation that can only be satisfied and corrected by a significant downside movement in real estate prices. Expect this. It’s actually already occurring. We are seeing it in the most bid up areas, especially coastal, mountainous resort, or lake properties, where, in many parts of our country, prices have already fallen 20% since May of this year.

FROM A FINANCIAL PLANNING STANDPOINT, THIS IS AN EASY CALL

If you are sitting on highly appreciated investment real estate, you have two compelling reasons to consider lightening up. One is that President Biden’s proposal wants to eliminate the 15  to 20% long-term capital gains tax rate you would occur when you eventually sell, and implement a tax as high as 43.4%! The current administration also wants to eliminate the “step-up” in your cost basis that would occur with any property or investments you leave to your heirs. This would create not only a crisis for family farms upon the owner’s death, but would result in the liquidation of many businesses, upon the owner’s death, in order to pay estate taxes.  The beneficiaries of an estate would have to sell quickly to satisfy these estate tax obligations, penalizing the net left to the beneficiaries. So reduced demand (as COVID-19 fades), higher tax consequences, and higher interest rates are likely to impair property values long-term.

Interest rates and inflation move in very long, approximately 20- to 30-year, trends. Our country has never seen a 0% short-term interest rate – until the latest crisis in the 2008-2009 recession – and then again during COVID-19. As we bounce off of these incredibly low interest levels, we project that rates will go well into the teens over the decades to come. Over the next three to five years, we would anticipate more than a doubling of current 15 to 30 year fixed mortgage rates.

CONSIDER

It’s important that you consider whether your investment property portfolio is too high a percentage of your assets/net worth and could impair your ability to preserve your net worth or impair an orderly estate settling after your death. It’s also important that you understand the effect of potential changes in our tax laws that could immediately diminish the value of real estate property. If you’d like to talk about this, please contact us at (859-223-6333 or sfa@spectrumalliance.com.

Source: https://fxn.ws/3B9JraO

*Full listing of all disclosures (bit.ly/3lGX3mM)

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