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Financial planners faced with questions from boomers about a pending real estate bubble need to separate froth from fact and discuss such a possibility and the impact a pop could have on what is for most a sizeable part of their net worth, several planners say.

“Next to what you car you drive, everyone is talking about how much equity that they have in their house,” says Phil Cook, a certified financial planner with Cook & Associates, Torrance, Calif.

But, beyond the boomer cocktail banter, it is an issue that should be addressed, he adds. Boomers who are thinking of buying want to know if they should wait while those thinking of selling want to know if they should do it now, Cook continues.

“Excesses of anything, whether fashion or finance, tend to mark the end of a period,” he notes.

Cook describes a discussion he had with one couple that talked about borrowing equity and buying property in Las Vegas with the intent of flipping it. “When they get through with me, they were not talking about that.”

To help clients who have questions about getting in or out of the current real estate market, Cook gives them a history lesson on California real estate which he says “softened considerably” in 1973-74 and in 1989-90.

“Many,” he continues, “cannot at this point see a reason for a decline, but that does not mean that it is not there. It just isn’t apparent yet.”

The discussion can also lead to other worthwhile conversations such as whether a mortgage should be paid down more quickly, Cook adds.

“We get questions on the bubble very frequently. Every day we address the issue,” says Jim Holtzman, a certified financial planner with Legend Financial, Pittsburgh. When the question comes up, it is not so much about selling but about buying a second home, he adds.

A discussion about a real estate bubble is not a distraction to financial planning efforts, he says. What can be distracting is when a client wants to pull money out of a portfolio to buy in a heated market, he says.

Questions are both specific to boomers financial plans and a general effort to understand the nature of the current real estate market and the national economy, he adds.

It is important to listen and to understand what the specific concern is, Holtzman says.

And that concern can vary depending on whether the client owns a commercial or residential real estate investment trust or an actual property, as well as in what part of the country the client lives, he adds.

Holtzman says that there are parts of the East and West coast that he thinks are overvalued. Many of these areas are in their fifth or sixth year of property appreciation, a trend he says is “unsustainable” in the long run.

A number of studies and indicators such as the PMI U.S. Market Risk Index, issued by PMI Mortgage Insurance Co., Walnut Creek, Calif., suggest that real estate in certain parts of the country are overvalued (see accompanying chart.)

So, when a financial planner is having a discussion with a client, it is important to discuss factors such as job growth which can drive supply and demand, he says.

Among the other topics that Holtzman says he raises include the rate of return which factors in real estate taxes and maintenance costs.

Christopher Rand, a certified financial planner with Met Life Securities, San Diego, says the bubble discussion is coming up during a high percentage of client meetings. The discussion isn’t usually a distraction unless people are considering a sale now, he says.

If boomers want to downsize, they want to know if they should do it now or whether they should wait, he says.

In such cases, he says that he performs an analysis and starts by contacting a real estate broker to get a sense of market conditions.

Factored into any decision on selling is the boomer’s age, Rand says. Is the boomer 50 years old and thinking of selling in 20 years or older and thinking of selling in a couple of years? he asks.

If a boomer decides to sell, then you have to look at taxes on capital gains, he continues. In a region such as southern California, over a 20-year time period, there has been significant appreciation, Rand says. So, he adds, a boomer who sells could be looking at capital gains of $500,000 or more.

If a boomer in California is nearing 55 years of age, it might pay to wait until the boomer reaches age 55 because of California law which allows a seller over 55 years old to carry a low property tax base if they move to a smaller house, Rand explains.

The current law was shaped by Propositions 13, the result of a taxpayer revolt over property taxes led by Howard Jarvis as well as subsequent Propositions 60 and 90 which allowed those over 55 years of age to transfer their assessed valuations if they moved within the state, according to the Howard Jarvis Taxpayers Association Web site.

That can make an appreciable difference, he continues. Rand cites one example in which the couple lived in a house for 40 years during which time the property had appreciated from $25,000 to $750,000. Property taxes on the house were $800, he continues. A similar property recently purchased for $600,000 has property taxes of $6,000 a year, he adds.

In such a case, if the boomers were 53 and considering a sale and the purchase of another home in California, he might well recommend waiting until age 55, according to Rand.

“Excesses of anything, whether fashion or finance, tend to mark the end of a period”

===============

Notes from interview with Jim Holtzman, a certified financial planner with Legend Financial, Pittsburgh

==we get questions on the bubble “very frequently. Every day we address the issue.”

==says that it is both specific questions and just an effort to understand what is going on

==want to understand what is going on with the national economy

==also want to understand if it will have an impact on a portfolio

==says that for those holding REITs, depending on the REIT, it could have an impact

==depends on whether it is a commercial or a residential REIT

==not as much on the commercial side

==you listen to them and understand what the concern is–says there is a mix of concern and information gathering

==our concern is that in some specific areas, there is a bubble

==says that he thinks that there are a lot of areas on the East and West coast, where properties are overvalued

==that is where there has been the most appreciation in the last 5-6 years

==such appreciation will be “unsustainable” in the long run

==says it depends on supply and demand–what is driving the appreciation

==is it job growth?

==boston

==issue of flipping in a relatively low interest rate environment

==says that long term rates have not gone up and when that happens,

==says that at some point, “the next wave of people” will not be able to sell and will have leveraged

==IOs, 1, 3 adjustables

==and often don’t have the strongest balance sheets

==investment -rates of return–things go into it like real estate taxes, maintenance costs, and rates of return

==when the questions come up, it is not so much about selling but about buying a second home

==is the whole issue of the “bubble” distracting to financial planning for boomers?

==”I do” think so.

==if a client wants to pull money out of a portfolio to buy, that can be a distraction

==

Christopher Rand

CFP and CLU

Met Life Securities

San Diego

==it is coming up a very high percentage of the time

==what is the concern?–if they are thinking of downsizing, then they want to know if they should do it now or they should wait

==if they have a 2-3 story house and their parents are in need of LTC right now, then they have a better understanding of the issues

==says that they would do a market analysis and start by contacting a realtor to get a sense of market conditions

==what is the time horizon–are they 50 and thinking of selling in 20 years or are they thinking of selling in a couple of years

==if it is 20 years, then I’m not as concerned

==but if they are moving out of town, then you have to look at things like capital gains taxes

==in Southern California, over 15-20 years, there has been significant appreciation so that you could be looking at capital gains of 1/2 million or more

==says that you have to evaluate as part of the whole financial plan

==have to consider the average closing costs, and capital gains and try to minimize that

==for instance, in California, he notes Proposition 13 which allows a seller over 55 years old to carry a low property tax base if they move to a smaller house

==cites one example in which the couple has lived in the house for 40 years and it is worth approximately $750,000. It was bought for approximately $25,000.

==the property tax is $800 a year.

==says another property that he knows of that was recently purchased cost $600,000 and has property taxes of $6,000 a year

==so, if a person was 53 and was considering it, he might recommend waiting until they were 55 to avoid adverse tax consequences

==says he doesn’t see it taking people’s eye off of the ball. “It is only a distraction if people are considering a sale now

==

Phil Cook

Cook & Associates

Torrance, Calif.

==it should be addressed

==people are talking about it and if they are thinking of buying, they want to know if they should wait; if they are thinking of selling, they want to know if they should do it now

==should I pull my equity out

==”excesses of anything, whether fashion or finance, tend to mark the end of a period.”

==a couple have talked about borrowing equity and buying property in Vegas to flip–”generally, when they get through with me, they are not talking about that.”

==he starts by giving them a history lesson–California in ’73 or -74; 89-90; early 82, when it softened considerably

==”next to what you car you drive, everyone is talking about how much equity that they have in their house.”

==older folks–should we pay down our mortgage–that is their question

==gives Boomers the history lesson

==many can’t see the reason for a decline but that doesn’t mean it’s not there. It just isn’t apparent yet.

==

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