Housing inventory has been lower in the United States since the market began rising interest rates in 2022. Americans live in their existing homes unless they are relocated by an employer or move to a state with a lower tax burden. Locally, we continue to see that the national trend is being confirmed in our market.
Currently, interest rates for a 30-year fixed-rate mortgage are around 7%, depending on the lender and the borrower’s creditworthiness. A little less than 18 months earlier, the same mortgage term would yield an interest rate of 3.5%. As the Federal Reserve (also known as “the Fed”) continues to raise the interest rate for banks to lend, the interest rates charged by banks must rise to maintain their current range (i.e., the amount of profit banks require from loans). bank to cover overhead costs).
To provide some perspective, my wife and I built our first home at the height of Desert Storm during the administration of President George HW Bush. During the invasion of Kuwait by Saddam Hussein’s Iraqi army, oil prices skyrocketed in international markets. This price increase caused other free goods to also increase. Inflation began to rise in the United States, and the Fed performed a function similar to that in 2023 by raising interest rates for lending banks. By raising interest rates, the Fed caused mortgages for first-time home buyers to be valued much higher than before the war.
Construction on our home was complete and we were excited to move from a 600 square foot apartment to a spacious 1,350 square foot mansion. Well, for two newlyweds starting their dream of owning a home, it felt like a villa to them. Our dream was shattered when the lender informed us of our permanent loan interest rate – 12.75%. Ouch! After much negotiation, our builder offered to pay three points to receive a reduced tax rate of 9.75% and we were once again incredibly happy homeowners.
Interest rates are much lower today than they were in 1990. Why is this a problem for people who want a new home? First, the Fed gave us the feeling that interest was low or non-existent. Banks were able to maintain lower lending rates for their customers and continue to generate excellent profits. The portfolios were loaded with low-interest mortgages secured by properties worth more than the loan amount. However, in most cases, people do not appreciate change.
Changes are the result of our economy going through different phases of performance. The four phases of our business cycle are expansion, peak, contraction and trough. The government seeks to influence the different phases of the economic cycle by providing stimulus during downturns and troughs in order to stimulate the expansion of jobs and gross domestic product in our country.
There are many economic reasons to sell a primary residence. First, if you have lived in the property at least twice in the last five years, your gain from the sale would be excluded from federal income taxes for $250,000 to $500,000, depending on filing status and other criteria.
Another economic benefit of selling a home is that any taxable gains from the sale will be taxed at capital gains rates, which are currently lower than ordinary income tax rates. In Oklahoma, if an individual owns the qualifying property for a period of five years or longer, the capital gains would be exempt from state income taxation.
Home prices will continue to fluctuate depending on inventory, mortgage rates and public demand. Buying a property is a crucial decision. By analyzing the qualitative and quantitative factors, you can be sure that your family is investing a generous portion of your lifetime income in an asset that can produce tax-efficient gains for your long-term benefit.
Some of life’s simple decisions are more complex when all factors are considered. To gain confidence in your next real estate transaction, contact an independent, fee-based CERTIFIED FINANCIAL PLANNER™ professional to guide you through the process. Your home may be one of your most valuable investments. It is crucial to consider your real estate investment as part of your family’s net worth to secure your future.
Fiona Apple said it best: “Home is where my habits have a living space.” See you at the soccer game!
EDITOR’S NOTE: The information in this article is for educational purposes only and does not constitute tax advice. Past performance is not a guarantee of future results of an investment. Investing involves risks, including loss of principal.
Registered securities offered by Cambridge Investment Research, Inc., a broker/dealer, member FINRA/SIPC. Jimmy J Williams is an investment advisor representative of Compass Capital Management, LLC, a registered investment advisor. Cambridge and Compass Capital Management, LLC are not affiliated. 321 p. 3., Ste. 4, McAlester, OK 74501. Cambridge does not provide legal or tax advice. Please consult your legal and tax advisor for specific estate and income tax planning strategies.
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