5 questions about today's housing market

It may be a good time to review how real estate fits into your financial plans.

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Key takeaways

  • With the recent run-up in home prices, many people are wondering if a crash is on the horizon and if this is a good time to sell.
  • It’s impossible to predict what will happen to any market in the short term, but it may pay to develop strategies to use your assets efficiently.
  • It may also be a good time to reassess your housing situation and the role of real estate in your financial plans.

Real estate can play a lot of roles in your financial life: It may be a big part of your overall net worth, a major monthly expense, and in some cases a significant part of your investment portfolio or income stream. As a result, any change in the economics of the housing market may cause you to question your plans.

With the recent run-up in home prices, many people are wondering if a housing crash is on the horizon and if this is a good time to buy or sell. But there are other questions too. If you decide to buy, how will you finance your purchase? Do you need to worry about changes in tax laws? Does your family need help navigating this market?

It’s impossible to predict what will happen to any property market in the short term. But with a lingering scarcity of homes for sale, rising asset prices, and potential tax changes in the future, you may want to develop strategies to use your assets efficiently to make a transaction and update your financial plans. Here’s what you need to consider.

1. Are we headed for another crash?

Home prices have hit new records during the last year, but while some investors may think today’s situation is reminiscent of the housing bubble burst in 2005 that led to the Great Recession a few years later, there are some important differences.

“In 2006 and 2007, we saw demand drop off considerably, and you had a lot of low-quality mortgages, while many financial institutions were over-leveraged into the residential housing market,” says Lars Schuster, institutional portfolio manager for Fidelity’s Strategic Advisers LLC. “Today the financial institutions are in much better shape, rules have ensured higher-quality mortgages, and it doesn't appear rates will rise quickly. So it’s a very different situation.”

Cary Sylvester, chief operating officer of HomeStory says that today’s run-up in prices is due to COVID-related supply challenges, high demand, and low mortgage rates, and expects those trends to moderate, but not reverse themselves.

“Whenever you see prices move up this fast you get concerned, but I think that as inventory starts to stabilize, you will see prices stabilize,” says Sylvester. “Things may cool off, but I don’t see signs of a crash."

2. Is it time to sell?

High housing prices can make it seem like a great time to sell. But before you pull the trigger, consider a few things. First, you need to be able to find a suitable replacement home, and that may not be easy in today’s market. States like Florida that have been relocation-friendly in the past have seen a significant rise in housing prices and limited supply. Also, remember that the world may continue to change: Some companies who had let their employees work remotely are now requiring them to return to the office.

Remember that where you live is about a lot more than home prices. Consider how moving could affect your family dynamics. It can be difficult leaving a place where you have established deep roots—especially if you have children who will need to transfer schools or aging relatives who may need your help. Finally, if you are buying a retirement home, think about whether it will be suitable for your needs as you age and if you will be able to access the health care you need in your new community.

3. Should I make an all-cash offer?

One thing that has changed in today’s home market is the growing prevalence of all-cash offers. With lots of investors in the market and few homes available, sellers are unlikely to take an offer with any strings attached. They might even prefer a buyer who can pay in full.

Alex Getsinger, vice president and financial consultant with Fidelity, says that he has some clients who have been wondering how to most efficiently free up cash to make a purchase. He says it's important to consider the costs, taxes, and other implications when deciding how to fund a deal. For instance, tapping into a tax-advantaged retirement account might result in income taxes or penalties, while borrowing against existing home equity might provide lower rates but involve using your property as collateral.

Here are some things you might want to consider:

  • Avoid withdrawing funds from retirement accounts, because the money may be taxed as income and/or come with penalties.
  • Consider selling your existing home with a leaseback provision, allowing you to use the proceeds for a purchase but remain in the home.
  • It may be worth exploring the rates for a home equity line of credit or a margin loan using your existing financial assets as collateral, which may offer competitive rates, but be aware of the risks involved.
  • If you are selling investment assets to fund a purchase, consider the potential tax implications of the sale.
  • If you have the means and opportunity, you may want to consider turning to companies that specifically fund all-cash purchases for a fee.

4. Should I take advantage of today's tax rules?

For investors with significant real estate assets, the pending tax law legislation is a good time to review their situation with a tax advisor.

After 2025, the current federal estate tax exemption amount of $11.7 million for individuals is set to be reduced roughly by half, but proposed legislative action could move that reduction up to as early as the end of 2021. If your assets, including real estate holdings, already put you over the uniform federal exemption amount, or if you own assets that you expect to appreciate significantly, it may be worth revisiting your estate plan to consider the role of trusts and how you have titled your assets.

For more on this topic, see Your top 5 estate planning questions.

5. How can I help my family in this market?

The current housing market has been particularly tough on first-time homebuyers, who may be bidding against investors or depending on a mortgage for their offer. You may have adult children in that position, looking to buy, but trapped on the sidelines. How can you help?

An intra-family loan might allow your child to make a larger cash offer at good rates, and potentially provide an opportunity for you to transfer wealth to your children without reducing your estate tax exemption. However, the rules are complex and strict. There are minimum interest rates required, and the transaction must be conducted at arm's length, among many other restrictions. An intra-family loan will also have income tax consequences for both the borrower and the lender. If structured improperly, this arrangement may cause adverse and unintended tax consequences. Speak to your attorney and tax professional before moving forward with an intra-family loan.

Bottom line

In a post-pandemic world, many are rethinking their overall life and financial plans. With home prices up and tax law changes on the horizon, it may be a good time to reassess your housing situation and the role of real estate in your financial plans.

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