The 'Couv'

The 'Couv'

Tuesday, January 25, 2022

Can Expensive Real Estate be a GOOD Thing?

Washington State is now famous for its expensive housing. Sure, states like California and Hawaii have significantly higher housing costs, but Washington is currently the 4th most expensive in the US. This can be a problem for retirees looking for a place to hang their hat. What if I told you, that higher housing prices can be beneficial?

Now this is an angle that only works in certain situations. But buying a house with 20% of you own money in an expensive market can lead to far greater wealth as the home values increase. Later in life that expensive house can provide a lump sum of cash or a lifetime of handsome cash flows whereas a cheaper house appreciating at the same rate cannot produce an equal equity gain over time. 

Say I buy a $500,000 house here in Vancouver USA with $100k down. Lets say over 20 years the house doubles in value which based on the last twenty including a HUGE correction in 2009-2012 is still conservative, I now have an asset valued at $1,000,000 with a debt load of $202,450. That is nearly $800,000 in equity and roughly $750k net if I sell the house. God forbid I need specialized elder care at this point, I can afford $5,500 (State Average) a month for more than 11 years!

Let's take a look at a cheaper state like say Mississippi. Now a nice house down near Gulfport can be had for $250,000. Run the same scenario out twenty years and you have a house worth $375,000. Why? Because Vancouver USA has more than double the rate of appreciation over the last 20 yeas than has Gulfport, MS. Now all fairness, the past doesn't alway mean the future will be the same. So we owe $101,225 and have an equity position of nearly $275k offer roughly $250k net after sale. Comparable elder care is about 25% less expensive in Mississippi. I will still run out of money in less than 6 years at the star average of $3,500 a month. Not only is there less money to pay for care, you are getting arguably less quality care since Washington is among the highest rated states for health care.

Many retirees plan on using the equity in their home to stabilize cash flows as retirement funds become diluted by inflation. A reverse mortgage is an option for some and so long as there is ample equity, the reverse mortgage can provide actual income. The more expensive house will generate a larger cash flow all else being equal.

Paying all cash for a property is not always the best idea. A reverse mortgage can sometimes be a better option providing cash based on a current value could protect the owner from downside market trends that occasionally occur. The reverse mortgage is designed as a long term investment for the bank with the short term protection of a large equity position. I am not pushing reverse mortgages here, but for some they can be a good tool especially in a high value area.

Last bit on the reverse mortgage, they are very rate sensitive. Higher interest rates reduce the amount of potential cashflow due to the higher loan service needed to cover the interest. Interest rates could rise in the next few years to levels that make the reverse mortgage unsustainable and thus unavailable.

So for buyers using a traditional mortgage to buy their retirement home, expensive states tend to be a barrier and Washington is among them obviously at #4 on the median housing cost list. But again if housing costs are rising equally the equity gained in a state like Washington is going to be far greater than that gain in a less expensive state. Some states with low housing prices have these low prices because the market doesn't appreciate as well as other states. In that scenario the cheaper house not only produces a lower gross equity gain it does so at a slower rate of gain. If you are going to stay in the house till the bitter end, this is not a problem. But what if you need to sell it to provide cash for elder care like the scenario above? You could end up on federal assistance rather than choosing your own care options.

Retirees should take time to work with a professional planner to see how their own situation lines up and where the best options are. Here in Washington we are plagued with high housing costs in most parts of the state, but we have no income tax, and reasonable property tax rates. We have excellent weather to suit nearly any preference. I said nearly, if you want that tropical island feel Florida is that way (pointing vigorously to the Southeast). 

When you decide Washington is the place for you, call me and I'll help you find the ideal house.

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