Call for a FREE Consultation and Report

For many, the equity that exists in a home or other real estate investments are their largest assets.  Depending on the location of the property and the period owned, equity can often be in the hundreds of thousands of dollars.

We believe this asset should be monitored and managed just like someone manages their 401k account or any other investment held.  However, it is often not managed effectively.

What do we mean by management?

Lastly, we provide a tool to all our clients that allow them to monitor their home values and provides insight into the changing value in their neighborhood.  It also provides information on current interest rates and has many other features.  If you are interested in having access to this service, just contact us and we will sign you up or you can sign up directly at https://hmbt.co/acJ8Ja.

Manage and protect your home equity.

Since the financial and real estate crisis of 2007-2009, the data shows that fewer people own houses than before, often by choice, and that people are buying their first house at an older age again often by choice.

There are many reasons for this, but one factor that is written about and discussed from time to time is the premise that renting is cheaper than owning a house. While this can be true in the short term for certain markets such as Denver, CO., the data is indisputable that people who own homes are wealthier than renters.

The Numbers Are Eye-Opening

According to the most recent Survey of Consumer Finance which was completed in 2016 by the Federal Reserve Board (the report is completed every three years) here are the findings on wealth:

  1. In 2016, the median net worth of homeowners in the U.S. was $231,400 (a 15% increase from the last survey in 2013).
  2. The median net worth of renters in the U.S. was $5,200 (a 5% decrease from the last survey in 2013).
  3. The median net worth of a homeowner in the U.S. is 45 times greater than the median net worth of a renter in the U.S.

While there may not be a direct cause and effect relationship that entirely explains the disparity (there are undoubtedly other factors), the Survey of Consumer Finance makes clear that there is without a doubt a strong correlation between home ownership and wealth.

It is estimated by the U.S. Census Bureau that that there were approximately 118.3 million households in 2016. This data also showed that 63.4% of the households owned their home and 36.6% rented. (Source: Pew Research analysis of Census Bureau Housing Data, report published July 19, 2017 based on 2016 data).

  1. While approximately 65% of the households headed by someone under 35 rented; Almost 35% owned;
  2. More telling is the fact that 41% of the households headed by someone between the ages of 35 to 44 rented; and
  3. Approximately 20% of the households headed by someone between 45 and 60 rented.Often people try to explain the disparity in net worth between renters and homeowners by stating that only young people rent and older people own homes. Again, while a factor, this reason does not account for the large disparity in net worth given the high numbers of renters across all age groups and the relatively strong homeownership number for those under 35.  

What Accounts for the Disparity?

  1. Simply put, homeownership is a form of ‘forced savings’. Every time you pay your mortgage you are contributing to your net worth. Every time you pay your rent, you are contributing to your landlord’s net worth.
  2. Homeowners are the beneficiaries of 100% of their home’s appreciation. In Colorado, homes have appreciated 366% since 1991, which is the second highest number for any state in country during that period. Renters experience no appreciation.
  3. The monthly cost of having a mortgage is fixed (i.e. it does not rise), which supports financial stability. A renter is subject to annual rent increases that have averaged between 5% to 10% in the Metro Denver area over the last 10 years. From 2010 through 2017, rents have increased 48% in the Metro Denver area. With wages rising at a much slower pace, renters lose purchasing power every year and are in a worse financial position every year.
  4. To the extent that rent payments may be less than a mortgage payment in the early years, most renters do not invest the difference and they spend it on other items, so the opportunity for investment returns on any savings is lost.
  5. Homeowners receive preferential tax treatment under the Internal Revenue Code with many of the costs of homeownership being deductible. None of the costs of renting are deductible.
  6. The ability to convert equity into cash in order to meet other financial objectives. No such option exists for renters.

Conclusion

We often hear people wonder out loud if “now is a good time to buy” or “if there is a real estate bubble that is ready to pop.” The simple reality is that over time home values have appreciated substantially, especially in Colorado. This is anticipated to continue with Colorado’s population projected to continue to increase due to the strong economy and a desirable lifestyle for many. Given the lack of building and the desire of most people to live close to centers of employment, prices will continue to go up simply due to supply and demand.

Until there is a recession or economic slowdown that impacts the local economy in a meaningful way, Colorado will not experience a decline in prices and will likely continue to experience appreciation although not likely at the levels seen since 1991. But who would have thought my first house that was purchased in 1992 for $88,000 would today be worth between $400,000 and $425,000?

Nationwide, the housing prices have increase 161% since 1991. In Colorado housing prices have increased 366%, which is second only in the country to District of Columbia. (Source: Federal Housing Finance Agency (FHFA), House Price Index, November 27, 2018). Since the recession of 2008 and 2009, the net worth of homeowners has continued to increase, while the net worth of renters has declined during the same time period.While it is clear not everyone can or should buy a home and there are situations where it does make financial sense to rent for some, period. However, for those whose financial situation and current goals support taking on the financial obligation of homeownership, it is well worth it.

MAJOR ANNOUNCEMENT

As of March 2018, Spectra Mortgage can now offer Reverse Mortgages to its clients. More importantly, we are now positioned to provide our clients the information they will need to evaluate all their mortgage and financial options when it comes to managing their largest asset.

Wayne is looking forward to using his financial background as a Certified Public Accountant with over 25 years of experience providing tax and financial advice and over 13 years in the mortgage industry providing mortgage and real estate finance advice.

Like a lot of financial products, Reverse Mortgages have their place as a financial planning tool. As the population ages, more people will want to understand and evaluate whether a Reverse Mortgage is right for their situation.  Of course, getting an honest and fair evaluation without sales pressure from a trusted advisor can be an obstacle, since many people who are interested in finding out their options don’t feel comfortable calling a call center 800 number.

Starting now, if you, your friends, or your family are interested in getting educated about Reverse Mortgages and finding out what the pros and cons are, Spectra Mortgage will be a great resource to obtain the information needed. We can talk to you about your mortgage options from your first mortgages to your last mortgage and every option in between.  We can also work with your other advisors including family, accountants, financial planners and attorneys where necessary to help you manage your largest asset.

Our approach will be the same as you have experienced in the past. We provide our clients the information they need to make sound financial decisions.

If you have any mortgage needs or questions about Forward or Reverse Mortgages contact Kim Renquest or Wayne Tucker today.

Author, Wayne Tucker

As many of you know in my former life as a CPA, I was a tax partner at a large accounting firm. In this role, for 20 years, I paid very close attention to the changes in the tax law and how they affected my corporate and business clients.  So, I was particularly interested in the tax reform that was signed into law in December and how they will impact my mortgage clients.

It is not an understatement to say that the tax bill signed in December is the most significant change to the Internal Revenue Code since the Tax Reform Act of 1986. In many ways, it is a structural change that eliminates a lot of personal and business deductions (i.e. legal loopholes) in exchange for lower overall tax rates.  It also significantly impacts investment in the U.S., repatriation of earnings held outside of the country by companies such as Apple, Google, Amazon and many others (estimated to be as high as $4 trillion dollars).  Surprisingly, it also impacts the real estate and the mortgage industry in a significant way.

Following are the four areas of the tax bill that will have the largest impact on owners of real estate.

  1. The deduction for state and local taxes (this includes property taxes) is now limited to $10,000 annually;
  2. Beginning in 2018 mortgage interest is only deductible for mortgages up to $750,000. Under prior law the cap was $1 million.
  3. Beginning in 2018 interest on Home Equity Lines of Credit (“HELOC’s”) will no longer deductible. (This applies to existing HELOC’s as well as new HELOC”S); and
  4. An increase in the standard deduction to $24,000 annually which will mean fewer people will be eligible to itemize which means that their current mortgage interest, property taxes and other itemized deductions will not be deductible at all.

The change that may lead to the most activity in 2018, is that many people who have HELOC’s in place should evaluate whether it makes sense to consolidate their HELOC with the first mortgage before interest rates start to rise (see the interest rate outlook in the article in this issue that looks forward to 2018).

The second thing I would encourage everyone to do, is to have their tax preparer, as part of the preparation of the 2017 tax return, prepare an analysis of how their tax situation will be impacted in 2018 by the new tax law.

Each of the provisions outlined above, will result in a significant amount of deductions being lost by homeowners. Additionally, there are many other changes that will likely affect that tax situation of many people in addition to the 4 items outlined above. The good news, is that for most people, the reduction in the tax rate will offset the loss of the deductions.