By: Dividend Sensei
What about rising interest rates? Won’t higher mortgage costs mean that home prices simply can’t keep rising at current rates? Well yes, if they climb high enough. However according to BankRate.com the average 30 year fixed mortgage rate is now 4.71%. That’s still low by historical standards. And since long-term Treasury bond yields are now no longer rising, mortgage rates may not end up rising to the 5% or 6% level that many predicted earlier this year. That’s because mortgage rates benchmark off 10 and 30 year Treasury yields. And according to Morgan Stanley, a peaking of US economic growth and rising trade fears is likely to mean that long-term interest rates have not just peaked for 2018, but might actually decline a bit. And if economic growth ends up slowing in 2019 and 2020 as the stimulative effects of tax cuts and $300 billion in additional spending wear off, then muted inflation expectations might keep long-term interest and mortgage rates at roughly the current level or lower, for the foreseeable future.
What about rising supply? If home prices keep climbing then couldn’t home builders flood the market with new construction, potentially capping home price increases or even causing another price crash? Well no, because building houses is still a highly labor intensive and slow process. Currently there is a massive shortage of construction workers. According to the Bureau of Labor Statistics or BLS there are 232,000 unfilled construction jobs and the tightest labor market in nearly two decades means that filling those positions can’t be done quickly. For example in June the construction industry hired 13,000 net workers and has created 282,000 net jobs over the past year. This means that at current hiring levels it would take nearly a year to fill the current openings, and in that time new ones will be created.
The labor shortage is causing wages in the construction industry to rise, which is what one would expect with such a severe shortage of supply. In June the average hourly wage for construction workers rose 3.5% according to the BLS. That’s 37% faster than overall wage growth across all industries. As a result home builders are looking to maximize the value of the workers they already have and whose pay and benefits are rising at an accelerating rate. This means that rather than build more starter homes, they are looking to allocate their scarce construction workers to building larger homes. Which combined with Millennials increasingly looking to buy such houses, is helping to drive up home prices across the nation.
The bottom line is that a combination of: massive supply insufficiency, strong and growing demand, a large and expanding labor shortage in construction workers, and flat (and historically low) mortgage rates, is creating a housing market that will likely see prices keep rising at a brisk clip.
So here’s how you potentially use that to your advantage and help fund the retirement of your dreams.
How You Can Use Rising Home Prices To Get A Prosperous Retirement
64.2% of Americans own their own home, which represents the single most valuable asset they have. According to the St. Louis Federal Reserve in Q1 of 2018 the average US home sold for $374,700. Now contrast that with the a the average household retirement savings for 56 to 61 year olds which is $163,577 according to a May 2018 study by the Economic Policy Institute. In other words, the average household nearing retirement, who owns their home outright, has home equity more than double their retirement savings.
Now assuming you have a high enough income and are willing to save aggressively, and invest it into a low cost index fund, then potentially you may have a sufficient nest egg for retirement by the age of 65 to 70. However if: you can’t greatly increase your savings rate, don’t want to put it into a stock heavy portfolio, or if the market ends up returning the 4% to 6% or so total returns that Vanguard is expecting over the next decade, then tapping into that home equity is potentially the best (or only) way to fund a prosperous retirement.
Now you can monetize your home two different ways. If you want to remain in your current location and can afford your property taxes, utilities, and maintenance costs, then a reverse mortgage might be an option. This allows you to receive monthly payments for as long as you remain in the home. If you die or sell it, then the home gets sold to repay the loan. Or if you are willing to move and retire in a lower cost state with a better climate (like Florida), then you can simply sell your home and can buy a new lower cost model (downsizing) there. Or better yet, you can rent, which a study by NerdWallet shows is now the cheaper option compared to buying a similar home in all 50 states and DC.
The post tax and post commission price of your home will then provide you with a substantial cash infusion that you can combine with your existing retirement savings. If you then invest that into a low risk, high-yield, dividend growth retirement portfolio, then combined with your social security benefits this should generate enough income to ensure a prosperous retirement.