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Interest rates are rising and the housing market is still wild: Tips from a wealth manager

Despite rising rates, the housing market is still out of control, with rentals in the Hamptons listing for more than $1 million per month. The Escape Home’s Danielle Hyams spoke with Kenneth Chavis, a senior wealth manager on what to expect.

Kenneth Chavis

EH: Are we starting to see the housing market respond to rising rates?

Chavis: Yes, we are just beginning to see the housing market cool from a sales price growth perspective, as a response to rising interest rates. As the benchmark mortgage interest rate rises, we can expect this to continue to have a cooling effect on national home sales prices. For perspective, a 1% interest rate increase on a $500,0000 mortgage increases a borrower’s monthly payment by about $300. This moves the needle for many first-time buyers and may lead to those buyers lowering their purchasing range or may lead them to continue renting.

 

EH: Is buying a second home still a good investment? These markets exploded during the pandemic. Thoughts on them now? 

Chavis: Any second home buyer should strongly consider the ‘why’ behind their desire to purchase an additional home. If your goal is to enjoy part of the year there, host family vacations and/or pass an heirloom to the next generation then a second home makes a lot of sense beyond its investment merits. However, for those looking to buy a second home strictly for investment or rental purposes, then I would urge buyers to scrutinize the numbers, understand the dynamics of the local economy, remain informed on your local housing market trends and to carefully assess where the second home fits into your overall financial plan. Some of the markets that exploded the most during the pandemic — typically reasonably priced, more remote areas close to mountains and/or bodies of water, are now seeing the most cooling from a sales price and rental perspective, as they peaked during the pandemic but are now less favored as folks return to in-person work in metropolitan areas and as interest rates have increased.

 

EH: What are the main factors to think about when buying a house? 

Chavis: Your happiness and peace of mind with the home, neighborhood and area should be at the top of your priority list when thinking of buying a home for you and/or your family to live in. Buyers now no longer place proximity to work at the top of the list like most had in the past. The Covid-19 pandemic had a drastic effect on employment trends, causing many employers to offer flexible and remote work arrangements.

 

EH: We hear from many people who lost out in bidding wars over the last few years. Do you think the next few years could be their time? 

Chavis: Unfortunately, I expect bidding wars to continue for at least another 12-24 months due to the following reasons 1) many home buyers are, often unknowingly, competing with investment firms who have deep access to capital and can make all cash offers and, 2) home inventory is still much lower than it has been in recent years and supply chain bottlenecks, as well as inflation, have resulted in much slower building than was anticipated just 6-12 months ago.

 

EH: Any tips on how to save money or make it go further than it might feel?

Chavis: The largest expense that most of the clients have when they hire me is income tax. Between federal and state income taxes, it doesn’t take much to end up paying 30% or more of your gross income in taxes. Limiting this expense especially in retirement is key to making your nest egg go further so that it can sustain your lifestyle for the duration of your life. Every reader should speak with their certified financial planner or qualified tax advisor on strategies for reducing their income tax bill, not only for the current year but for each tax year for the remainder of their lives.

With inflation at a 40-year high at over 8%, I urge everyone to assess their subscription services to magazines, blogs, streaming services, etc. This is something I’ve personally done over the last couple of months and by canceling or suspending subscriptions I no longer need, I have saved about $200/month. [Dear reader, Please do subscribe to The Escape Home though; we’ll keep offering value and ways to make your money go further in these uncertain times!]

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