The Retirement Group is now offering a new service which will give Fortune 500 employees a better idea of how long their assets will last in retirement. The new service, called a RetireKit, is a complimentary cash flow analysis which will take into account the current housing market’s effect on the value of a client’s home. The Retirement Group will also alert clients when they see the housing market beginning to take a turn for the worse, giving them a chance to evaluate their options while the market is still viable.
The housing market has been on fire recently and many Americans are becoming concerned that they may be in the midst of another housing bubble.
The Retirement Group has many clients who work for major corporations like AT&T, ExxonMobil, Chevron & Kaiser Permanente, and a significant number of them are considering retiring in 2021 because they can downsize their home and use their increased equity for retirement. Oftentimes, employees nearing retirement age are especially anxious about the housing market as much of their net worth is tied to the value of their home. There are several benefits of retiring in 2021, especially for AT&T employees. At AT&T, employees can lock in their healthcare subsidy, capitalize on low interest rates for their lump-sum, and receive great value for their home. However, there is a growing concern that the housing market will take a turn for the worse and homeowners will lose value on their current assets.
For those who lived through the 2008 housing collapse, it may appear that the current housing market bears an uncanny resemblance to the pre-crash economy of 2007. The real estate market has been appreciating through the pandemic and homeowners became $2 trillion richer in the first three months of 2021. When drilling down to the largest metropolitan areas in the country, the 10-city composite was up 14.4% housing price appreciation in April, up from 12.9% the previous month. Phoenix, San Diego, and Seattle reported the highest year-over-year gains. This brings back the concern that this is another 2007 housing bubble.
Although a few housing data points are elevated, there is significant evidence that this is not currently the 2007 Housing Bubble. There are five key drivers which indicate that housing today is rising for the right reasons, and the housing sales forecast is not as bleak as it may seem.
The key housing market data differentiating the current real estate market from the 2007 real estate market are positive events for housing that did not exist in 2007.
1. Home Equity
Current home equity is at record levels, which reduces the risk of foreclosures seen in 2007. According to the Federal Reserve U.S. home equity totaled more than $22 trillion at the end of 2020, almost double the amount of outstanding mortgage debt at $12 trillion.
2. Housing Supply
There was too much supply in 2007, versus today’s market, which is short 5.5 million homes. New home starts have gone from 40,000 per million since 1960 to 20,000 per million for 10 years starting in 2010.
3. Housing Demand
In 2007 there was a drop off in demand versus today’s market where demand is high and there are more buyers than baby boomers selling.
4. Replacement/Reproduction Costs
The cost to reproduce a home acts as a floor of value for homeowners, and currently the cost is rising.
5. Affordability and Multiple of Rents Valuations
Housing affordability is indicated using three key metrics; home prices, rates, and wages put into a single number. Although it dipped recently, it is still above the 30-year average as family incomes rose 16.9%. The ratio of mortgage payments to monthly household income is much lower today. To put the power of income into perspective, there only needs to be a 2.4% rise in income to equal a 12% rise in housing prices if rates stay the same.
What should homeowners be looking for going forward? They should look for changes around the following:
1. Affordability and multiples of rent/income getting closer to 2006 highs. Look for rental price increases and whether incomes increase.
2. Look for rental price increases as current leases expire and the moratorium expires in June.
3. An inventory increase from vaccinated sellers and baby boomers more comfortable listing homes and allowing potential buyers in their home.
4. The move away from big cities should slow as the drop in rents are bringing people back, at the same time companies are requiring workers to return to office in late summer. The Hybrid (home and office) worker will continue with the trend toward remote working, online shopping, and home entertainment continuing.
5. Homebuilders seeing these 2021 trends will react with new home starts as they respond to low inventories.
6. Watch closely for the potential pivot to a supply spike in 2-3 years as the market always overshoots in both directions.
If any of the factors listed above start to shift it may be time for a retiree to consider selling their home and capitalizing on the record high prices. To receive a complimentary RetireKit and cash flow analysis, please call The Retirement Group at (800) 900-5867. To schedule an appointment with a retirement advisor from The Retirement Group click here: https://retirekit.theretirementgroup.com/contact-us
Click here for a more detailed explanation of the market drivers which indicate a housing crash is unlikely: https://blog.theretirementgroup.com/blog/retiring-worried-housing-crash
To view The Retirement Group’s library of content click here: https://retirekit.theretirementgroup.com/industry-redirect
This is Not the 2007 Housing Bubble” The Retirement Group, 25 April. 2021, https://theretirementgroup.com/
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