Before Calling The Movers, Boomers Should Consider Some Facts
Boomers who are literally sitting on a pile of cash as they watch the price of their primary home appreciate handsomely may wonder if selling now will make it possible for them to locate to a more desirable address: Easy Street.
But before boomers call the movers, financial advisors suggest that a careful examination of the facts is needed.
It is true that average U.S. home prices increased 5.56% in second quarter 2003 over second quarter 2002, according to the Office of Federal Housing Enterprise Oversight, Washington. Over a five-year period, that appreciation has been 37.88%, the agency says.
Prices of other goods and services grew at a 2% rate, it adds.
OFHEOs Housing Price Index suggests two things, the agency says: continued strength in housing markets as well as an orderly deceleration in growth.
But, advisors contacted by National Underwriter, maintain that appreciation aside, other factors need to be considered.
Chief among these is, Where are you going to live? says Guy Cumbie, a certified financial planner with Cumbie Advisory Services, Fort Worth, Texas.
Locking in the appreciation in a primary residence is not necessarily a bad decision, he says, but “if you are talking about a cyclical trade only (selling high and buying low,) then that can be a bold planning move that puts you into the situation of paying a very high price for your own replacement shelter if it becomes protracted.”
Ones primary residence is typically a single, undiversified asset as well as a large investment that makes up a big part of an individuals or familys asset base, he adds.
“It can be speculative and you need to look at it very carefully to make sure it makes sense in your specific circumstances,” Cumbie says.
Additionally, he also notes the fees associated with selling and then buying another home.
For the seller working through a real estate broker, commissions typically run 6% of the sales price, although online sales can reduce the commission fee.
When it can make sense to realize the gain on a primary home is when a boomer is contemplating a life change such as a move or a downsizing or simplifying of lifestyle, he continues. If it facilitates a transition, then it may be worth considering, he adds.
A primary residence is a long-term investment, but beyond that is really a lifestyle choice, says Nancy Flint-Budde, a certified financial planner in Salem, N.Y. Simply put, it is a “use asset,” she says.
For instance, Flint-Budde says a couple she advises is focusing on simplifying life, and, as part of that life change, is selling their home and moving into one that is half the value of their original home.
In addition to lifestyle choice, locking in a homes appreciation also depends on how much longer a client intends to live in a primary dwelling, as well as goals and a clients cash flow.
But Flint-Budde questions selling a primary residence solely for the reason that the market has appreciated. “When is a good time to sell? What will the market be like next year?” she asks.
For disciplined boomers, a home equity line of credit may be a better way to access capital, says Flint-Budde.
Low interest rates and potential tax benefits make it an option worth considering, she continues. In effect, “you have liquidated what would otherwise be an illiquid asset.”
However, she notes, if the line is prepaid, costs associated with that line may become your clients responsibility.
And, Flint-Budde reiterates, the emphasis is on discipline since a home equity line is like having a credit card attached to the house.
For such clients, she is recommending taking a line of credit even if they are not going to use it because in the future, companies may stop offering these products.
But, according to Cumbie, the primary criteria is what you would do with the money. “If it furthers consumption habits that are already getting you into trouble,” then it is not a good idea, he emphasizes.
But, “if you are taking equity off the table in a disciplined and elective fashion” then that is another matter, he concludes.
Aside from finding a solution to the question of where are you going to go?, Phil Cook, of Cook and Associates, Torrance, Calif., wonders about the exercise of selling one property for another of comparable value.
If there is a specific reason for purchasing a new primary home such as finding a home with more space or living in an area with a better school district, then there is a good reason, he says.
But selling a primary residence because one believes that “prices in the area are at the top of the real estate market cycle and expecting to buy a comparable house later after a decline in prices for less than the previous selling price is playing a dangerous game,” he says.
The reason, Cook continues, is that “market cycles are notoriously fickle and unpredictable. I would consider this strategy very aggressive.”
One option that could be examined would be to borrow against the value of the house to buy an additional property or other investment such as equities.
Or, if the house is sold and another purchased, he continues, rather than taking all the equity and putting it into a new house, some of that equity could be used for another investment. Increasing leverage in good times increases investment gains but, Cook cautions, in bad times, it also increases losses.
Commenting on that scenario, Cook says he would rather earn 25% on his money than 5%. Conversely, he continues, he would rather lose 5% than 25%.
Reproduced from National Underwriter Life & Health/Financial Services Edition, October 24, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.