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Answering Your Financial Questions
Every day we answer financial questions for our clients, so today we are going to be answering three questions we’ve gotten this past week. You may be asking yourself these same questions.
Question #1 – Should I wait to buy my first house when housing prices cool down?
I was asked this question yesterday, and the answer may surprise you. I’m not convinced that housing prices are going to come back down in any significant manner in the near future. Someone might object, “But what about the housing crash of 2008?” The Housing Crisis of 2008, which was part of the Great Recession, was caused by many things, but most notably it was lax underwriting standards with banks. What this means is as long as you had a pulse and a social security number, you could get a loan. When the music finally stopped, many people were not able to repay their loans. They were given loans that they could not afford, and that was a pyramid that just kept building and building and eventually came crashing down. This led to a credit crisis, which left most banks reeling and unable to provide additional credit to the market. With bank’s restricted on the amount of credit they could extend, fewer people were able to qualify for loans, which led to less demand for housing, which led to prices going down. Not to mention you had a ton of houses being built in the years leading up to the recession. This time around, the increase in housing prices is largely driven by a shortage of housing. Yes, it is driven by some extent by stimulus that is being pumped into the system, but even more than that there just are not enough houses. Economist Brian Wesbury with First Trust identifies that we need to build 1.5 million new homes each year to keep up with population growth and scrappage. We’ve not built that many homes since right before the Great Recession in 2006. That means we have about 15 years of a running deficit of homes and catching up from that deficit will not happen overnight. We are simply not building enough to catch up. Because banks are strong currently and credit is ample and available, my best guess in the short-term is that housing prices may level off or decrease a little bit, but they are not likely to come crashing down. As the Fed begins to remove some of its monetary accommodation, you may start to see that leveling off process. So, back to the question should you wait to buy your first house? I would say, only if you can wait until the next recession – and no one knows how long that will be. Could you find yourself under water on your loan balance vs. your home’s value if you buy right away? It is certainly possible, but financial decisions are best made when you focus on what is known rather than what is unknown.
Question #2 – Should I keep paying on my loan rather than paying it off because I get a tax deduction?
No. If a tax deduction is your only reason for keeping a loan, you should just pay it off. For example, if you have a loan at 3% and you are in the 25% tax bracket, your tax deduction will only reduce your cost by .75%, leaving your net cost for borrowing money at 2.25%. You are still paying to keep that debt out there. In other words, you are not going to get a tax deduction that will offset the amount of interest that you are paying. It will only reduce the amount of interest you are paying on a net basis. It will always save you money to pay off debt. The real question when trying to decide whether to pay off debt is “what do I gain by not paying it off?” We know how much you gain by paying it off, the interest rate of what you are paying off in savings. If the answer in not paying something off is peace of mind in having cash available and if that peace of mind in our example is worth 2.25%, then don’t pay off the debt. But if you are just accumulating cash with no purpose and no ultimate benefit, you should certainly pay off your debt. Limiting your debt gives you more options and less stress for whenever the next recession rolls around. We know that we will have another economic contraction at some point, and the less debt you have when it happens will give you more options to navigate and survive that time when it comes.
Question #3 – What can I do to preserve my assets as I face long-term care needs in the future?
Many of you have worked hard all of your lives to save up money for your retirement years. It is natural to wonder if those assets will be depleted by long-term care expenses. We are living longer and that would in turn reduce the amount of money potentially available to pass onto your heirs. You also might be worried about the fear of running out of money. There are asset transfer techniques and various trusts that can be created, generally with 5-year look back periods in the state of Tennessee, that you can explore. If you are interested in those options, you should seek the services of a competent and trustworthy estate planning attorney to learn more about the benefits and drawbacks of those techniques. One solution is purchasing Long-Term Care Insurance to create a Long-Term Care benefit that might help mitigate a reduction in your other assets. These long-term care policies can have monthly premiums just like your car or home insurance, or they could be single premium policies. In other words, if you have a lump sum sitting in a CD not earning much in income, you could convert that money to a Long-Term Care policy that provides a Long-Term Care Benefit. If you don’t need Long-Term Care, then these policies often include a death benefit that can return to your heirs. Lastly, if you do not need either, these policies include a return of your premium where you can get your money back after a certain number of years. If you’d like to find out more about what Long-Term care solutions might be appropriate for your unique situation, feel free to reach out to us.
We love helping people make financial decisions and we want to provide information to help those decisions be more confident and competent. Please remember that today’s conversation does not constitute a recommendation. You will need to consult your own financial advisor for financial advice. We hope this episode has been helpful for you and if it has we hope you will subscribe and share this week’s episode on social media. We are a Member FDIC and Equal Housing Lender. Until next time… God Bless.
– President Chad P. Wilson, CFP
Today’s episode of “Money Matters” was written and recorded by President Chad P. Wilson of McKenzie Banking Company / Foundation Bank on September 14, 2021.