The recent hike by the Fed for interest rates and their 2016 guidance will certainly have a big impact on how the bond and stock markets perform in 2016. While housing has been red hot over the past six years, here are three reasons why buying an expensive house is a terrible idea now as interest rates climb over the next twelve to twenty four months.
- INTEREST RATE AND HOME PRICES- Remember, that as interest rates rise it means that new mortgage payment will cost Americans more money on a monthly basis for the same amount of mortgage. Just as prices have risen during this declining low interest rate environment, as interest rates rise you will see the higher end of the real estate market decline. Where else could it go if interest rates go up by 1% or 2%? In addition, you will see the assessments for your local and county taxes go up as it pertains to your real estate. The key investment strategy here is to begin to stockpile cash (remember 2008?) and look to be able to buy homes for cash or borrow money when you get lower real estate prices even if interest rates are higher.
- SALARY ADDICTION- A big home comes with big expenses. There isn’t just the cost of furnishing your home (which prices are extremely high right now), but homeowners that reside in a large square footage house are always ridden with items that need to be fixed in the home. On average, about 1% of your home value will be your cost for just maintenance and upkeep alone. Have you ever had to replace three air conditioning units instead of one? Have you calculated the cost of painting the exterior of a larger home? What about ongoing landscaping? My big fear for most people now is that your salaries and bonuses may be at the high end of the scale and as your larger companies slow down growth, you could see salary cuts or layoffs which can put tremendous stress on your family budget.
- BOOMERS, BOOMERS, and MORE BOOMERS- With more than one third of all people born between 1945 and 1960 having no real retirement savings, the equity in their homes represent the real money they have saved for their future. At first, they will work on getting by with social security and whatever savings they have in their pockets, but eventually whether they have multiple homes or just one home, you will see more renters and a flood of inventory into the market which will drive prices down.
You’ll see a ton of articles this year about what bonds and stocks to buy, but if you are feeling flush and considering upgrading to a larger home it might just be better to sit on the sidelines and wait it out.
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Ted Jenkin is a frequent guest columnist for the Wall Street Journal and Headline News Weekend Express. He is the co-CEO of oXYGen Financial. You can follow him on LinkedIn @ www.linkedin.com/in/theceoadvisor or on Twitter @tedjenkin.