Broken Dreams: What’s Going on in Housing?

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Have you been waiting to buy or sell a house? Are you tired of renting and have been waiting to purchase your dream home? Brian and Bo give you their thoughts on the housing market so you can make sense of the current housing environment.

The guys first look at few explanations for the suppressed housing market we have experienced the past few years by analyzing an article by Paula Pant, 5 Stats You Need To Know About The Housing Recovery.

  1. New Construction Starts Are Apartment-Centric
  2. Unemployment For Young People Is Still High
  3. Sales of Existing Homes Are Bumpy
  4. Delinquencies and Foreclosures Are Returning to Normal
  5. Homes Are Still Undervalued, But Improving

Brian and Bo also look into an article from Tim Manni simply titled, Why Aren’t More Young People Buying Homes? Here is what they found:

  • A large portion of the buying audience is still absent – young, first time buyers.
  •  Young American’s are still in favor of home ownership. However, there are far fewer young buyers in today’s market than there were post-war baby boomers.
  •  In today’s market, purchasing a home requires substantial savings, long-term job income, a decent down payment, and limited debt.
  •  The trend is also different today than in years past as young buyers are coming to the table with more money and looking for smaller homes on smaller lots. Additionally, in recent years, townhomes have become very acceptable alternatives to single family homes.
  •  The demographic in personal decision making has changed with younger people, who are now mainly looking for ownership after starting a family and having children. A trait contrary to the baby boomers, which would opt for a small starter home at a younger age.
  •  Most young people today may not see a first home come into the picture until they are between 33-35 years old.
  •  Homes have become less of a financial investment in recent years and more of a use asset.

Up to this point, the guys only discussed the symptoms of the market. They continue by giving their thoughts on future interest rate environments and forecast how interest rates may affect the housing market moving forward. They look into the article, Why interest rates may stay very low for a lot longer, written by Tom Petruno.

The article touches on the world debt crisis and how it contributes to lower domestic interest rates. The author even mentions PIMCO co-founder Bill Gross’ estimate of the Fed’s rate being no higher than 2% through the end of the decade! It seems that the Fed is still gunning for major economic growth and willing to maintain suppressed rates if they see any sign of an economic slowdown. Additionally, the overseas central banks comprised specifically of the EBC and Bank of Japan have shown no signs of increased rates.

So, what did this mean for the future of domestic housing prices and interest rates? With no foreign pressure to increase domestic rates on the Fed, we should see the current trend continue, and we could expect thirty year mortgage rates from 4% to 5% for years to come, if all else holds equal. This means the marketplace for new loans could remain very affordable going forward, which would drive even more buyers to the market.

Check back next week, that’s right, next week, for a follow up on this topic as well as further discussion on strategies for entering and exiting the marketplace and how to make home ownership as affordable as possible.

 

Top Tips to Prepare for Retirement

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Brian and Bo cover different strategies and steps to take when preparing for retirement and review features that are available in your 401k. The motivation for this show is two articles that finance blogger Dana Anspach recently released about 401k’s and other retirement accounts, 7 Things I Wish People Knew About 401k Plans, and 7 to-do’s before you turn 59.

First, the guys give you their view on Dana’s 7 Things I Wish People Knew About 401k Plans article:

  1. Rollovers are accepted - If you leave you can roll your retirement assets out of your 401k. This is especially important when your 401k investment lineup is limited.
  2. Automated portfolios work - Target date funds are great choices and capture a ton a diversification with professional investment management all wrapped into one holding.
  3. Stable value funds can be a great choice – If you are nearing retirement you need to start moving some of your holdings into more liquid and secure investments. These stable value options often pay solid interest rates which are typically much higher than what the bank will offer you on your savings account. Dana recommends having your first two to three years of retirement expenses in these holdings (and we completely agree).
  4. Age 55 is special! 401k’s allow distributions when you leave your employer after you reach age 55 without being subject to the 10% early withdrawal penalty. However, you will still owe ordinary income taxes on the distributions. Also, if you took the advice in the 1st step and rolled your 401k into an IRA, we suggest you have a plan for the age 55-59½ “donut hole.”
  5. Credit Protection – That’s right, if your get sued your Qualified Plan assets are protected, even from bankruptcies! OJ Simpson is always a major example when he was sued but was able to save some of his wealth due to the ERISA protection regulations.
  6. Roth options inside your 401k are great - There are pros and cons to this option. You forgo the tax deduction that you would have received for normal pre-tax contributions, but you do get the advantage of tax free growth if executed correctly. Remember, it is good to have tax diversification also. No one knows what future tax laws may hold. Therefore, it makes sense to have different “pots” of money (see our last podcast) set aside for the future.
  7. NUA treatment is nice, if it makes sense - If your employer offers company stock, you can get special tax treatment on distributions at retirement, called Net Unrealized Appreciation. When you take a lump sum of the company stock, the contributions you received (basis) are taxed as ordinary income and any growth in that company stock receives capital gains treatment, if certain holding requirements are met. You can also roll the other non-company stock portion of your 401k into a Rollover IRA.

The second article that Brian and Bo cover from Dana is, 7 to-dos between 55 and 65 for a better retirement:

  1. Prioritize values – Would you prefer to retire early and have less or work longer and have more?
  2. Know your net worth – We push for everyone to complete a Net Worth statement at year end. It is a great feeling when you put everything together and are able to high five over the leaps and strides you have accomplished over the past year, two or ten, and longer.
  3. Estimate your benefits – Review any pensions that are you expecting and try your best to estimate your Social Security payments. These factors are huge when trying to calculate your current savings goal for your future use.
  4. Get a handle on healthcare – We see this far too often when people tell us they would like to retire early, but do not have a plan for healthcare. Medicare coverage does not start until 65 and most of the time you will need additional coverage’s like: Medicare part B, C, D, Medigap, Long-Term Care, etc… Make sure you have options lined up before your decide to retire early.
  5. Make an income timeline – Run your personal finances the same way that you would operate a business. In actuality, you are a business and your success depends on your planning. Set income and savings goals and make sure that you are doing everything possible to insure your future success.
  6. Outline options - Explore what income sources are available at retirement. Part-time jobs are usually great because they keep you busy and keep your savings untouched to grow a little bit longer.
  7. Determine your level of engagement – What responsibilities are you going to take care of and what makes sense to outsource? Everyone’s situations are different and complex, but you need to have a basic understanding of how things change when you near retirement and what new risks you face.

Check back in two weeks for our next show!