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  • Writer's pictureJimmy J. Williams, CPA/PFS, CFP®

Everything Cycles in our Economy

Housing inventory is lower in the United States since the rising rate market began in 2022. Americans are living in their existing homes unless they are transferred by an employer or retiring to a state with lower tax burdens. Locally we continue to see the national trend borne out in our market.

Currently, rates for a 30-year fixed mortgage are approximately 7% depending on the lender as well as the borrower’s credit worthiness. A little less than 18 months earlier the same mortgage term would garner a rate of 3.5%. As the Federal Reserve (a.k.a., “the Fed”) continues to increase the rate for banks to borrow money for lending, the interest rates charged by banks must rise to maintain their current spread (i.e., the amount of profit on loans needed by the bank to cover overhead).

To provide some perspective, my wife and I built our first home at the height of Desert Storm during the administration of President George H.W. Bush. During the invasion of Kuwait by Saddam Hussain’s Iraqi Army, oil prices precipitously increased on the international markets. This spike in prices caused other complimentary goods to increase as well. Inflation began to rise in the United States and the Fed performed a similar function as it is doing in 2023 by raising rates on lending banks. By raising rates, the Fed caused mortgages for first-time homebuyers to be priced at a much higher rate than experienced prior to the war.

The construction was completed on our home, and we were ecstatic to be moving from an apartment of six hundred square feet to a spacious mansion of 1,350 square feet. Well, it seemed like a mansion to two newlyweds that were starting their dream of home ownership. Our dream was disrupted when the lender informed us of our permanent loan rate – 12.75%. Ouch! After much negotiation, our builder offered to pay three points to gain a reduced rate of 9.75% and we were, once again, incredibly happy homeowners.

Fast forward to today and rates are much less than what we incurred in 1990. Why is this a problem for individuals who desire a new home? First, we have been lured into a sense of low or no interest by the Fed. Banks were able to maintain lower loan rates for their customers and continue to make excellent profits. Portfolios were overwhelmed with low interest mortgages collateralized by property with a value exceeding the loan amount. However, people do not appreciate change in most instances.

Change is the outcome of our economy cycling through various phases of performance. The four phases of our business cycle are expansion, peak, contraction, and trough. The government attempts to influence the various phases of the business cycle by providing stimulus during times of contraction and trough to reignite the expansion of jobs and Gross Domestic Product for our country.

There are many economic reasons to sell a principal residence. First, if you lived in the property as your principal residence at least two of the last five years your gain on the sale would be excluded from federal income tax for $250,000 to $500,000, depending on the filing status and other criteria.

Another economic benefit to the sale of a home is that any taxable gains that may arise from the sale would be taxed as capital gains rates which are currently less than ordinary income tax rates. In Oklahoma, if an individual has owned the qualifying property for a period of five years or more, the capital gains would be excluded from income taxation by the state.

Housing prices will continue to fluctuate based on the inventory, mortgage interest rates and demand by the public. The purchase of a residence is a crucial decision. By analyzing the qualitative and quantitative factors, you can feel confident that your family is investing a generous portion of your lifetime income in an asset that may provide tax efficient gains for your long-term benefit.

Some of the simple decisions in life are more complex when all factors are considered. To help you gain confidence about your next real estate transaction, seek an independent, fee-based CERTIFIED FINANCIAL PLANNER™ professional to guide you through the process. Your home may be one of your most valuable investments. Considering your investment in real estate as part of your family’s net worth for support of your future is critical.

Fiona Apple said it best, “Home is where my habits have a habitat.” See you at the football game!

Registered Principal Securities offered through 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 S. 3rd, Ste. 4, McAlester, OK 74501. Cambridge does not offer legal and tax advice. Please consult your legal and tax advisor for specific estate and income tax planning strategies.

The information in this article is for educational purposes only and is not intended to be tax advice.

Past performance is no guarantee of future results in any investment. Investing involves risk including the loss of principal.

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