*Update 07/06/20* We hope all of our clients and loved ones continue to stay healthy and as peaceful as can be. The Weatherly Team is here to help. We continue to conduct business seamlessly and securely from our office and home offices. While financial services firms are excluded from the California stay at home order, the health of clients and our team remain paramount. Our team continues to work remotely since 3/16/20, adapting to ongoing strategies for phasing back to the office. Calls continue to be routed appropriately to ensure your ability to connect with us during business hours.

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Discovering New Trends in a Post-COVID Environment

Cole Hansen, CFA, CFP® Wealth Management Advisor | Aubrey Brown, CFP®, Wealth Management Associate Advisor | July 30, 2020

The novel Coronavirus has dramatically disrupted lives on a global scale.  As businesses and individuals attempt to adapt to a post-COVID world, a series of new trends and opportunities have emerged.  We have observed a shift away from major US cities to more affordable communities outside of traditional metropolitan areas. Clients transitioning to new living spaces have capitalized on the low interest rate environment and explored multi-generational gifting strategies or intra-family loans with our team.  As we all continue to battle the pandemic, we welcome you to lean on your trusted Weatherly advisors to safeguard your financial assets and uncover potential planning opportunities.

White Picket Fence Comeback

A trend the Weatherly team is following closely has been the exodus of some Millennial and Generation X populations from cities to suburbs. As real estate prices and rents have skyrocketed in major metropolitan areas, like New York and San Francisco, young adults have looked for relief in less expensive pastures as they start families and settle in their careers. Outside of monetary factors, recent concerns over COVID-19 infection and social turmoil have also augmented the migration to suburbia. Homeownership in the United States rose to 67.9% in the second quarter, its highest level since the housing peak in 2008. Conversely, the number of renter households fell by 7.2%. Owners under age 35 have been the leaders in driving this trend as the group’s home ownership rate is now at 40.6% [1]. Skilled workers that previously may have been required to work on-site, may now have the flexibility to stay with their current employers, but resettle to a different location and work remotely. We may see a lasting impact on commercial properties as businesses move away from shared workspaces and offices as a heightened focused is placed on social distancing and telework.

Zero-Interest Rate Policy (ZIRP)

When the markets took a downturn in late February and early March 2020, the Federal Reserve acted quickly and provided a safety net for the domestic economy by lowering the Fed Funds rate to near 0%.  This paramount move was in hopes to add liquidity by allowing businesses and consumers to borrow money at favorable rates and spur investment activity. The Fed Funds rate has had a spillover effect on the broader fixed income market as interest rates across the board came down in tandem. Included in this, is the 10-year treasury yield which is largely tied to mortgage interest rates.  This has sparked a fury of homeowners looking to refinance their mortgage at lower interest rates.  You can check today’s current interest rate estimates via sites like bankrate.com . With unemployment skyrocketing, refinancing has been a silver lining for Americans to maintain cashflow needs or provide the ability to invest extra funds into a deflated stock market.  The historical low rates have also created an opportunity for the first-time homebuyer looking to enter the residential real estate market.

Gifting Outside the Box

The simultaneous decline in real asset values and volatility in financial markets have created a gifting opportunity for high-net worth clients interested in advanced estate planning. Depressed assets, that may appreciate significantly following the COVID-19 pandemic, could possibly be transferred earlier than anticipated through a direct cash gift, sale by installments, or transfers in an intra-family loan. In these scenarios, assets can be passed or purchased at a depreciated market values with interest payments at modest levels due to historically low interest rates. Below we’ve outlined some strategies we’ve reviewed with clients assisting the next generation with first-time home purchases.

  • Direct Cash Gift – We’ve recently worked with clients to assist their heirs through a one-time gift or periodic gifting schedule. Parents can also offer to co-own or purchase a home outright with a child as the parent, with a longer credit history and greater asset base, can often qualify for a lower interest rate than the child could on his or her own. Although this is the simplest method of transferring wealth, it’s important to be mindful of the annual gift tax exclusion, $15,000 per person as of 2020, given that any gifts above this amount can result in a decrease in your lifetime exemption and a gift tax return filing.
  • Installment Sale – An Installment Sale is a transfer of property where at least one payment is made in a tax year different from when the sale is agreed upon. Breaking up the sale allows for the seller to piecemeal the capital gain realized from selling the asset, which may have appreciated significantly from purchase date or feature cost basis reduction from depreciation. The buyer also doesn’t have to come up with the full payment amount right away and can chip away at the purchase price over time.
  • Intra-Family Loan – A loan, with the proper documentation, can be a great way to provide liquidity to younger family members with a purchase of an asset that would normally be out of their price range. Starting with a promissory note that outlines the loan amount, term, and an appropriate interest rate is the best practice to ensure that an audit down the line won’t result in any tax consequences. Here’s a link to an Index of Applicable Federal Rates (AFR) to use as a baseline for the stated interest rate.

How Can WAM Help?

We invite you to leverage us, as your trusted advisors, to run financial planning scenarios to determine housing affordability, suggestions to estate plans and connections to mortgage professionals. We can help streamline the mortgage process by providing necessary documentation to lenders in a secure format.  For those new to the residential real estate market, we suggest reviewing our First-Time Home Buyer’s Checklist which provides a step-by-step guide to home ownership. Please contact us with any questions or to continue the conversation.

Sources and Further Reading  –

[1] https://www.fa-mag.com/news/u-s–homeownership-rate-soars-to-highest-level-since-2008-57120.html?section=43&utm_source=FA+Subscribers&utm_campaign=acdfb5b2ad-FAN_AM_Send_052220_A-B+Split_COPY_01&utm_medium=email&utm_term=0_6bebc79291-acdfb5b2ad-222272225

https://www.thebalance.com/treasury-note-and-mortgage-rate-relationship-3305734

https://www.businessinsider.com/personal-finance/federal-reserve-interest-rates-cut-money-savings-loans

https://www.nerdwallet.com/article/mortgages/closing-costs-mortgage-fees-explained

https://www.nerdwallet.com/blog/mortgages/differences-conforming-nonconforming-loans/#:~:text=Conforming%20loans%20are%20mortgages%20that,both%20types%20of%20conventional%20loans.

https://www.chase.com/personal/mortgage/home-mortgage/getting-started/mortgage-prequalification

https://www.wsj.com/articles/escape-to-the-country-why-city-living-is-losing-its-appeal-during-the-pandemic-11592751601?mod=e2fb 

** The information provided should not be interpreted as a recommendation, no aspects of your individual financial situation were considered. Always consult a financial professional before implementing any strategies derived from the information above.