Man: Would you like an opinion on a financial matter you're dealing with? Whether it's about retirement, investments, taxes, or 401(k)s, Scott Hanson and Pat McClain would like to help you by answering your call. To join Allworth's "Money Matters," call now at 833-99-WORTH. That's 833-99-WORTH.
Scott: Welcome to Allworth's "Money Matters." I'm Scott Hanson.
Pat: I'm Pat McLean. Thanks for joining us.
Scott: We're glad to be with you as we talk about financial matters. Myself and my co-host here, we're both financial advisors, and we enjoy doing this podcast, taking some calls, talking about financial matters, what's going on in the world.
Pat: I was thinking about it this week. I was trying to remember how long we've been doing this. So I know that we had started...
Scott: Twenty-eight years.
Pat: Twenty-eight years. And the vast majority of it was pre-podcast, so radio.
Scott: And a little background on how we got started in this. So Pat and I have been financial advisors since...you were, I think, '89, entered the business. I entered 1990. We were with a different company for a couple of years. We started Hanson & McClain, which we changed the name to Allworth in 1993 as advisors. And so when you start a new firm with no clients...
Scott: ...I mean, our whole objective was let's create a financial planning-focused advisory firm, not investment sales. Because particularly, back then, it was loaded mutual funds and all that kind of garbage.
Pat: A shares, B shares.
Scott: Yeah, yeah, yeah. So we said...we had a different vision of what could become, and the independent registered investment advisor model was very rare back then, but that's what we created.
Pat: Not anymore.
Scott: Not anymore. And so we were at some conference, and there was this guy who had created a huge business, and he was only a couple of years older than us. And we're like, "Man, how do we...let's figure out what that guy's doing." So remember, Pat, we went and visited this guy in Omaha, Nebraska, and he had a radio program, a weekly radio program. And so, Pat and I thought, "That might be a good way for us to drum up some long-term clients, right?" Like we're on the radio long enough. And so I remember we got back to Sacramento, and Pat got on the phone, started cold calling the program managers at the different radio stations, and talked his way in.
Pat: Yeah, 28 years ago.
Scott: Twenty-eight years ago.
Pat: And we had clients then, and you know, it's unfortunate. One of my long-term clients passed away. But I mean, I have a...
Scott: Only one? Lots of them.
Pat: This week.
Pat: I have a conversation with his widow. I talked to her last week and said, "You know, let's give it," I talked to her the day after he died, "let's give it some time, and now we'll circle back." And one of the things that we counsel is there are no reasons to make immediate decisions regarding your finances.
Scott: In the midst of something like that.
Pat: In the midst of something like this. It's best to put it off for three months, six months, even a year.
Scott: Any major decisions.
Pat: Any major decisions, so home, how to invest, all those things.
Scott: Particularly on the investment stuff, because people can sell...
Pat: I've seen it happen.
Scott: Oh yeah, lots of times.
Pat: Lots and lots of times, so.
Scott: Anyway, we got a great program lined up for you today, so we're glad you're with us. We'll take some calls, talk about some things in the market. But we're going to start with Andy Stout, our chief investment officer at Allworth, just talking about the markets and what's going on. So, Andy, thanks for taking some time.
Andy: Thank you.
Scott: So just before we started recording, Pat had said to me, all the losses we had in the month of October were made up in the first...
Pat: Yeah, the first five days in November.
Andy: Yeah. If you look at just the returns for the fourth quarter, it's positive now after a pretty brutal month of October. I mean, just through, like, last Friday, the S&P 500 is now up almost 2% for the quarter. So we did erase those.
Scott: Yeah. Well, what happened there? Because you certainly wouldn't think this was going on. This could happen with the global turmoil, right? There's clearly some major issues that are going on around the globe, and yet we saw long-term interest rates drop like a rock at the same time that the stock markets rallied. So both the bond market rallied and the stock market rallied, both really strong performance for a week or two. But what was the catalyst for all that?
Andy: Well, the catalyst was the Fed. But first, Scott, I want to address what you just said right there, all the stuff going on in the world. There's always things going on in the world. You can look back at the history of anything, and you might just think, "Well, why should I ever leave my house?" Because the world's going to come to an end. But you know what, we always seem to overcome those. The economy and markets are the same. So there's always that wall of worry that we are able to overcome.
Now, in terms of last week and what's been going on really to turn the market around, well, it comes down to the Federal Reserve. That's our nation's central bank, by the way. They're responsible for controlling short-term interest rates. And during the month of October, markets were really worried about what the Fed was going to do and how much longer they're going to keep interest rates high, when they might hike again even. And then you had the Fed meet on November 1st, and they, essentially, telegraphed that we're probably done. And when we look at what we said in the past as far as future rate hikes, that's kind of outdated. We're more concerned now about market interest rates, like the 10-year treasury bond, and it being too high and helping the Fed do some of its work by helping to bring down inflation. So they're probably on pause.
Scott: And I think, also, didn't something happen with the Department of Treasury and how they're going to be financing the longer-term debt and signaling something there as well? Or am I confused?
Andy: Well, the Treasury does regular bond auctions, and one of their most recent ones, they did state that they would probably need to sell fewer bonds than what was anticipated. And there's been some pretty decent demand for the bond auctions as well. So there was some concern with the rising deficits that we would have to issue more and more and more and more and more debt, and it would become more expensive because there would be fewer buyers. Well, the supply came down just a tad, and the demand has stayed strong. So that's been key there as well.
Pat: And so, when we talk about supply and demand and the bond market with new issues, do high-quality corporates compete with the U.S. government bond in terms of... There's less issuance of high-quality corporates, which would actually drive more investors to the U.S. government. Is that true?
Pat: Yes. The U.S. government, that's obviously still considered the safest safe haven out there. And as far as, like, the number of AAA-rated companies, I think it's around five or so. So it's a pretty small supply.
Pat: Yeah. And they've issued long-term debt a couple of years ago, right?
Scott: Yes, yes. So they're not in the marketplace anymore.
Andy: Oh, yeah, they're not doing anything right now. There's really no benefit. If you were able to issue debt two years ago and longer-term debt, which a lot of them did, I mean, they're pretty much set for a while in terms of having to raise more funds.
Scott: Yeah. So, to your point, Pat, there's not that there's not much supply on the corporate side.
Pat: That's right.
Scott: Which further pushes the demand.
Pat: Yeah. And I just remember, when Microsoft was issuing debt...
Scott: Almost the same interest rate.
Pat: It was almost the same interest rate as the treasuries. And I thought, "Well, this is interesting." And that was two, two and a half years ago. I thought, "This is interesting." They're, like, four or five basis points higher yield than treasuries. So I thought, "Wow, that is an interesting paradigm."
Scott: Andy, we also saw that it appears that the economy is growing much faster than anyone anticipated. So we've got that, at the same time, long-term interest rates are dropping.
Andy: Yeah, the economy soared 4.9% in the 3rd quarter, and it was, really across the board, pretty strong numbers. Consumer spending was the driver again. It was responsible for 2.7 of the 4.9 percentage points, and that was really the biggest driver. Now, the thing is, that growth rate, that's not sustainable at all. I mean, consumer spending was lifted by these one-time events, like the Taylor Swift and Beyoncé concerts. I know it sounds silly to say, but that actually moved the needle when it comes to GDP.
Scott: That's crazy.
Andy: Well, when you talk about how those concert data is about 8.5 billion of value to the economy, it's a bit mind-boggling to think about it just from Beyoncé and Taylor Swift there. But here's the thing, that's not going to be able to continue because the excess savings or the savings that people built during the pandemic when the federal government had all their stimulus programs, those have been wiped out, according to the San Francisco Fed. So people don't have that excess savings anymore.
Scott: Yeah, it's not only a stimulus, but then, for a period of time, there was no entertainment. I mean, you think about...
Andy: That's another great point, right?
Scott: Dining and entertainment, for a lot of families, that's a pretty big chunk of their budget, particularly, if you think of middle class or higher.
Andy: $2,000 to get a ticket to the Taylor Swift concert is ridiculous. But then you also look at that excess savings gone. Savings rates are back down to lower levels around 3.5%. And then you look at the fact that personal spending has eclipsed personal income for the past four straight months. That's not sustainable. You can't keep spending more than you make unless you start to borrow more. And you look at where interest rates are, you look at where credit card debt rates are, home equity lines, the credit mortgage rate, I mean, it's super expensive, obviously, right now, where interest rates are. And that's going to make it more challenging for consumers to keep spending at this clip. They might be able to keep it up for another quarter or so, especially the holiday season, but I'm a little cautious on the consumer's health in the longer run for those reasons.
Scott: And talk a little bit about unemployment and what the job market looks like right now.
Andy: Well, the job market is not weak yet, but there are some real cracks forming. So we did get the unemployment rate update last week, and it increased from 3.8% to 3.9%. That's still a low number. That's why I'm saying it's not weak. But if you look at the trend, now, back in April, it's at 3.4%. So it's definitely been moving higher. And when you think about why that's going on and just the backdrop, you start to think about, "Well, the interest rates are starting to weigh on the economy, so employers are a little bit, you know, hesitant to keep adding jobs." So when you look at it from that perspective, you know, there's a little bit of concern.
Now, the bigger thing that I'm watching on the labor market front is continuing jobless claims. So jobless claims are people filing for unemployment benefits. There's initial, which is your first-time filers, and then there's continuing, which is ongoing. The initial jobless claims or those first-time filers, they're pretty low. I mean, that suggests employers aren't laying people off as quickly as one might suggest, given where interest rates are now, and they're in, like, the low 200,000s. But the continuing claims, that's risen pretty rapidly really in just the past 2 months, from around 1.6 million to a little over 1.8 million. And that's a relatively rapid rise when you look at the history of that data series, which suggests that the people who have lost their job are having a harder time finding work once they have been laid off.
Now, the last crack I will mention is that the quits rate is at 2.3%, which is a low number. During the pandemic and we were reopening, it was a much, much higher number. What this indicates is that workers don't believe they're going to be able to find a better-paying job if they just outright quit their job. So even the workers and employees are a little bit more cautious as well. Now, that's not to say we're going to have a recession tomorrow or anything like that. I mean, economists have been calling for a recession really for the past two years, and the economy has proved to be more resilient than not. So it's obviously a reason to focus on the long run and not make any rash decisions.
Scott: And wage growth.
Andy: Yeah, wage growth, that's been trending down as well. When you look at just inflation data, in general, there's lots of different metrics. But for wage growth, what we look at is average hourly earnings. And back at the beginning of this year, it was right around 5% almost on a year-over-year basis, and that's dropped down to 4.1%. So it's been moving in the right direction, the right direction, at least, from the Federal Reserve's perspective, because they want inflation lower. Obviously, if you're a worker, you might want that to be a little bit higher as far as you might be concerned. But it's trending down. And given where we're at right now, I would expect that trend to continue.
Now, will we get to the Fed's preferred 2% inflation target? They look at a different inflation metric, but it's still not close to that 2% level, and they have some work to do in terms of being able to be patient. Because I don't think the Fed needs to do anything in terms of raising rates anymore, but they need to let their prior rate hikes do some of the work for it because they are slowing down the economy. And I wouldn't be too surprised if we do get some rate cuts next year, but that could still not really have an impact on causing inflation to reverse course or anything like that.
Pat: Got it. So it's taking time to work these increases, take time to work through the economy. So before we go, give us a little commentary on what's going on in China. The bubble has finally burst on the real estate there, which just...it's mind-boggling to me that it's taken so long. But I guess that's what happens when you have state-controlled companies. This Evergrande, and I think the other one was Living Gardens, which is a third owned by the Chinese government. How is that going to affect the global economy, or will it?
Andy: Well, China is obviously a big player in the global economy, and their markets have struggled more than other areas. I mean, even just like the last year, China...
Scott: That's gonna be really interesting to watch China in the next couple of years.
Pat: Oh, yeah, especially their belt, and what is it, road and belt?
Scott: Yeah, all of it.
Pat: In third world countries.
Andy: Yeah. If you just look at the returns in 2022 and 2021, Chinese stocks fell 21%, 22% in each year. So that was obviously a foreshadowing because the market moves before the product economy of what's going on there. And even year to date, those stocks are down about 9%. So from a big-picture perspective, they are struggling. Their property market, I don't know if it's fully busted or anything like that, but the government is going to want to do more stepping in, try to patch things up. You know, the issue is you can only Band-Aid so much, and it just seems like you have people digging holes and other people filling those holes back in to try to grow their economy. And that's what you get in that type of communist society.
Scott: You're quite serious about that. I mean, they're trying to get young people because there's no jobs for them in the cities, they go back to the farms.
Pat: Yes. And then have more kids. So WeWork finally filed for bankruptcy. Finally. And if you've been a long-time listener of this program, when WeWork...
Scott: I think it was worth 47 billion at its peak.
Pat: Which was nothing but a sub-lease real estate deal, very similar to companies, like Regis, that have been doing it for years and years and years.
Scott: Long-term real estate lease with a short-term tenant, yeah.
Pat: Tenant. Yes. So just personal, how did you feel watching that thing blow up?
Andy: Well, WeWork didn't work, right? When you think about it in terms of watching it blow up, I mean, I don't really get any joy out of it, but I would say I was not surprised. It's not something that's sustainable at the levels where they were trying to build it out. The strategy in terms of what they were doing, similar to Regis, especially in today's post-COVID world, it didn't make sense. I wasn't too surprised that they did file for bankruptcy. I mean, they were one of the more successful IPO's out there in quite a long time. It was a startup company that really struggled during the reopening.
Scott: It was your classic...anyway.
Pat: You know what, when I see that and I see this Sam Bankman-Fried...
Scott: Same kind of stuff. It's just...
Pat: It just reminds me, personally, that the fad things are exactly that.
Scott: And you get these very eccentric leaders with a strange charisma about them, and they attract. It's like the most educated people, the most experienced investors, somehow get mesmerized by the individual and build their models based upon...they would never build those financial models on anybody else, but somehow they'd think...
Pat: I'm quite happy that I'm actually attracted to normal people and I'm not mesmerized by eccentrics, eccentric individuals, so.
Scott: Andy, is there anything that individual investors should be doing with their portfolios right now as a result of what's happened in the last few weeks?
Andy: You've heard it before, and I'm sure people get tired of hearing it, but staying the course still does make sense, because when you do make emotional decisions, they're usually wrong decisions. Because what people are usually influenced by is what they see, because we're not rational beings, right? We're irrational. And what you typically see is that news is best at tops and worst at bottoms, but that's exactly when you want to be investing is when news looks the worst. It's really hard to do that. So most people are better off instead of trying to time things, because timing backfires all the time, not every time but all the time, is really just focusing on the long run. I mean, I mentioned this earlier, economists have been predicting a recession for basically the past year, so it hasn't happened. The markets have been relatively resilient. So if you would have been based on those forecasts, you would have definitely hurt yourself financially.
Scott: All right. Well, thank you, Andy.
Pat: As always, thanks for being part of the Allworth team.
Scott: Yep, Andy Stouter, Chief Investment Officer.
Pat: And one of the most productive people I have ever met in terms of getting stuff done.
Scott: It's just crazy. We need to clone Andy Stout.
Pat: I know. Do you have any relatives?
Scott: He's always cool, always...you know. I've never seen you flustered. Maybe I can see it in your eyes a couple of times, but you never try to show it. And I don't know what happened to Andy. He got tired of us.
Pat: There we go. Anyway. He just doesn't like to hear people say nice things about him. He's showing up on us.
Scott: Anyway, glad to have him on the program. The longer I'm in this business and watching the financial markets, it's, like, kind of the... Well, trying to follow the economy and make long-term investment choices, that's fraught with peril, because you will react emotionally, and you'll make poor decisions. Studies have shown it time and time again.
Pat: Again and again and again.
Scott: Yes. All right, let's take some calls. If you want to be a caller on our program, have a financial question, we would love to schedule a time to talk with you. 833-99-WORTH is the number, 833-99-WORTH, or you can send us an email at email@example.com, firstname.lastname@example.org. We are in Georgia, talking to Joseph. Joseph, you're with Allworth's "Money Matters."
Joseph: Right. How are y'all doing today?
Scott: We're doing good. How are you doing, Joseph?
Joseph: I'm fine. I've got a quick question I'd like some help with. Based on the economy, and I've heard what you've been talking about, my wife and I have some property in two houses. It's all in a joining section. It's been valued at a sizable amount. We've been thinking about, instead of waiting and selling and moving, doing a reverse mortgage. And I hadn't been able to find anybody to give me any insight into the ups and downs of a reverse mortgage.
Pat: Well, you may have come to the right place. So just for a point of disclosure, Scott Hanson and I, while we were running Hanson & McClain/Allworth, as a side gig, we started a reverse mortgage company and sold it to Genworth. We started from scratch, and we sold it, what, three or three or four years later. I think we were the third largest in the country at that point in time, had something over 200 employees.
Scott: And when we created it, it was not really so much for our client base as much as it was for a lot of Americans that don't have a lot of other options. And the typical person who would take a reverse mortgage would be a widow in their late 70s, early 80s, don't want to leave their house, don't want to leave their community, and don't have a lot of other options.
Pat: And we started that, quite frankly, we started the reverse mortgage company because of this radio show, at the time, radio show. People were calling and asking questions about reverse mortgages. We did some research and realized that there wasn't a lot of financial planning around the reverse mortgage. If you called a reverse mortgage company at that time, they would just tell you a reverse mortgage is the right thing for you. And we wanted to come at it differently, looking at it as a tool for specific people. So that's our background in reverse mortgages. Tell us about your situation. Do you need income?
Joseph: Well, I do, and I have some debt that I'd like to get canceled. I'd like to have a little bit of cash in reserve, just for an emergency and maybe some expendable income that would free up. Of course, I get social security. My wife does. I get a pension from the postal service before I retired.
Pat: Okay. So, what are those numbers?
Joseph: How much I'm getting?
Joseph: Okay, between the two, for me, it's about $2,200.
Pat: Is that gross or net of tax?
Joseph: Well, that's what I put in the bank.
Pat: Okay. And how much is your wife receiving?
Joseph: Just a little bit less than that. She's probably around 1,850.
Pat: And your number, what are you getting in pension?
Scott: That was inclusive.
Pat: That's inclusive.
Joseph: That's everything that comes in combined.
Pat: Okay, so $4,000 a month. Do you have any money in the bank or investments or IRAs or anything like that?
Joseph: I don't have any of that. I got a little in the bank, but I don't have any kind of IRAs or anything.
Pat: And how much debt do you have?
Joseph: About $150,000.
Pat: Is that home equity debt?
Joseph: Well, I have a small...on the house is about $65,000. Then I've got a truck and a camper that I'm paying on.
Pat: How old are you?
Joseph: I'm 68.
Pat: How's your health?
Joseph: I do what I want to. I mean, I think I'm in good health.
Pat: Is your wife of similar age?
Joseph: No, she's a year younger than me.
Scott: And you say it's a property and two houses, or is it one property that has two houses on it?
Joseph: Well, it's one property with two houses. I've got, like, 14 acres of land with...there's two houses on it. Just when I took that money out, recently, or when I say recently, last year, sometime, the appraisal was $325,000.
Pat: And you owe sixty-five.
Scott: And do you rent one of the houses out?
Joseph: We do.
Scott: And what do you receive for rent on that?
Joseph: Well, I can't go into the details of why, but this lady needs help. This young lady needs help. And so she's paying, like, $450 a month rent.
Pat: All right. So your income is about $55,000 here.
Pat: And what would you, if you didn't do a reverse mortgage, what would you do?
Joseph: I would just keep doing what I'm doing, which means I would have, by the time I pay the bills, it would be a little bit leftover is all.
Pat: The problem is, $325,000, at the current interest rates, you're not going to be able to take $150,000 out on a reverse mortgage at your age.
Scott: No. And particularly, because there's two homes, so it's really looking at what's one home worth.
Pat: That's right.
Joseph: Okay, okay.
Pat: That's right. So the reverse mortgage, you know, it's easy enough to call one of these people, but they're going to come out there, and they're going to be confused by the structure of the fact that there are two homes. How old are the homes?
Joseph: Well, one is, gosh, it's probably in the '40s, it was built. The one that my wife and I live in, we just built it about 12 years ago.
Pat: So the one that was built in the '40s, they wouldn't put any value on it, whatsoever.
Joseph: Okay. Okay.
Pat: And you're not going to get to where you want to be.
Scott: I mean, you might be able to take $100,000 or $125,000 reverse mortgage, which could pay off that home equity loan. You say you took 65 grand out of your house a year ago.
Scott: What were those dollars used for?
Joseph: Well, my wife had to have a kidney removal, and with the insurance paying the way it did, I paid off those bills. And I did some, you know, little improvement work around both of them because I needed to do some things to the older house before.
Scott: And is that is that on a fixed rate mortgage or is that just...?
Joseph: Yeah, it's on a fixed.
Scott: And how much are your payments on that?
Joseph: $500 a month.
Pat: And what are your payments on the other $85,000 in debt?
Joseph: About almost $1,300 a month.
Pat: So you could look at it, and you do not want to leave the property.
Scott: I mean, if you were 10 years older, we would say, absolutely, it makes a ton of sense. I think our concern is that there's a good chance you're gonna live...and both you live into your 80s. You take a couple that's 65 years old today, and there's a greater than 50% chance that one of them is gonna be into their 90s. So our concern is not this year, next year, or the year after, it's 10 years from now, 15 years from now.
Pat: Can you subdivide this property?
Joseph: Yeah, I could, maybe. I mean, I think I could, yeah.
Pat: And what would the value of that? Let's say you took the property, split it in half, and sold the other house on that property. I don't know what the geography looks like. What would that value of seven acres of that property with that house on it be?
Joseph: Well, based on what they got back, you know, where I pay taxes, I mean, it probably would be in the $150,000 range.
Pat: All right. So here's how I would look at it. If you were my older brother, I would say, "Let's..." And, Scott, I might be making this more complicated, but I'd say, "Let's see if we could subdivide this property."
Scott: Well, here's your...I mean...
Pat: And then do a reverse mortgage.
Scott: Later. And you might be thinking, "Well, I don't want to subdivide." So, I mean, here's the reality. The truck and camper is not a cheap hobby for you, right? And I totally get it why you wanna do this.
Pat: And you might not even have enough money to go out and enjoy the truck and camper.
Scott: And you might say, "Well, I don't want to subdivide my property. I like having the 14 acres." But you're going to have a tough time having both the 14 acres and the truck and camper. So you might say, "I'm going to get rid of the truck and camper so I can keep the 14 acres," or you might say, "You know, I'm going to go ahead and subdivide, sell a piece of the land, use that so I can have better quality of life the next decade or so."
Pat: So when I look at this, and I'd say, "What's the first tact I would take?" see if I could subdivide that property. If you subdivided the property, would the older house be on the other property? Are they close to each other? It would be on the other property.
Joseph: They're close, but they're not...I mean, it'd be fine, I think.
Pat: Okay. So if you could subdivide that property and make enough money to actually pay off the consumer debt or the truck and trailer, the 85,000, and put a little bit of money in the bank, if you think you could get a $100,000 or $150,000 for it, you're home free. And not only that, not only that, it still allows you to go to a reverse mortgage in 8, 10, 12 years from now.
Scott: That's right.
Pat: Right? And that's how I would approach it. But I wouldn't be looking at a reverse mortgage now. If you're sitting in my office, I'd say, "Look, this is one direction to go, subdivide property. Do this and this." If you can't subdivide the property, then you have the other choice, which is, do we downsize, sell the property, free and clear, downsize into something less expensive? And pay off that debt that way and actually have more spendable income.
Joseph: Okay. Okay.
Pat: That's option two. But option one is the one I'd go for first. And then option three would be...
Scott: I wouldn't use a reverse mortgage at this stage.
Pat: Option three would be, you know, the reverse mortgage, and I would not...that wouldn't be, like I said, it would be option three, if that.
Scott: All right. Wish you well, Joseph.
Pat: I hope that helped.
Joseph: Well, thank y'all, because I got a better understanding now than just talking to somebody on the phone or...
Scott: They're going to want to say, because they make...
Joseph: Because my mind is thinking about what to do.
Scott: ...they make money when they sell reverse mortgages.
Pat: Yes, they don't... Yeah, yeah. And we don't have a dog in this fight.
Joseph: Right. And I got a better understanding of what I need to do, and I'm probably going to pursue dividing it up.
Scott: That is what I would look at, because that's going to afford you the flexibility to enjoy your truck and camper.
Pat: And you don't have to take care of seven acres. So it'll be someone else's problem.
Scott: Yeah. So, anyway, I appreciate the call, Joseph.
Pat: If you wanted to punish me, you'd put me on a piece of property with 14 acres. That would be punishment to me.
Scott: Why? What do you mean?
Pat: Just the idea of having 14 acres of things to...trees go down and...
Scott: When I was in fifth and sixth grade. I lived with my mom stepdad, my parents. I was one of those fortunate ones with four parents, let's just put it that way. So I left my dad. My dad lived in just a basic house. My dad didn't like doing any work around the house at all, like, Saturday, sitting around, watching sports.
Pat: That sounds like your dad.
Scott: Live and let live kind of guy. And then my stepfather was very much like, "Hey, we work."
Pat: Like, Saturday morning?
Scott: They're migrant workers from Oklahoma that went out west, right, when he was a little kid. So we had, yeah, 11 acres, and you get up, before school, collect the eggs from the chickens. In the afternoons, it was chores. And Saturday is a workday.
Pat: When do you mill the wheat, Scott?
Scott: We didn't mill wheat. But as a young man, actually, I really appreciate the experience because I learned how to work hard, but it also taught me that I do not want to live on a little farmette thing because that was not fine.
Pat: Well, coming into the Christmas season, I have to ask this question, since you were fortunate enough to have four parents, groups of parents. Have you seen the movie "Four Christmases?"
Scott: No, I have not.
Pat: You have not?
Scott: No. Do I need to watch it?
Pat: You need to watch it. It has become a staple in the McClain household, every Christmas.
Scott: Yeah, dysfunctional families. Not to say that mine was dysfunctional.
Pat: Well, I'm sure you're completely like every other family in America, completely functional.
Scott: I guess, what is the definition of functional?
Scott: If that's the norm, maybe it is functional
Pat: What's your base for comparison? But you should watch "Four Christmases."
Scott: "Four Christmases." So, hey, before we go to the next call, on reverse mortgages, here, I'm gonna give you two examples of how they shouldn't be used and ways that they can be brilliantly used based on people that I've worked with over the last number of years.
Pat: Even in today's interest rate environment.
Scott: So the worst-case scenario I saw was a couple. He had just turned 62. You have to be 62 or older to get the reverse mortgage. She was, like, I don't know, 56. And they took her name off the title.
Scott: Because she wasn't 62, so they can get the reverse mortgage, so they can go on cruises and travel more.
Pat: And you counseled against this.
Scott: She had actually retired a few years before her pension would have vested, because she just got tired of work.
Pat: Well, by the way, when you were doing this, you were doing this as the financial advisor. You've never sold reverse mortgages. We just own the company.
Scott: That's correct.
Pat: We didn't have licenses.
Scott: I highly advised against doing this.
Pat: Scott and I both didn't have licenses to sell reverse mortgages. We just own the company.
Scott: So that's the worst scenario.
Pat: That was a terrible idea.
Scott: And I have no idea where they're at. I'm sure they're totally broke, I mean.
Pat: Terrible scenario.
Scott: Because you spend... Reverse mortgage, in a situation like that, should be your last trip to the well.
Pat: It is the last trip to the well.
Scott: Okay, it is the last trip to the well. And if you're older, so that's the worst situation. One of the best I've seen, somebody who had plenty of assets, over a million bucks in his retirement account, he was widowed. His child, son or daughter, I forget, had moved maybe 150 miles from where he was. He wanted to go live close to his grandkids, but the homes there were much more expensive. So I think he lived in Central California and was gonna go near the coast somewhere. So it was gonna be very expensive. And we're trying to figure out how to make it work. And he didn't wanna take money out of his retirement account because of tax implications. And so he sold his home, used the proceeds as a down payment, and used the reverse mortgage as the mortgage. He bought, essentially, twice the house.
Pat: So he was able to buy a house that was probably twice as expensive as...
Scott: Exactly right. That was the perfect way to use it.
Pat: And he wasn't worried about leaving anything to the kids.
Scott: No, he had his own retirement account.
Pat: Yeah. And had he taken the money out of the retirement account...
Scott: And it worked out great because the property value increased much faster than the interest on the reverse mortgage.
Pat: But had he taken the money out of the retirement account, he would have cut off his income, and it would have been a taxable event all in one year.
Scott: That's exactly right. And then, you know, I forget what the house was worth, but it was... That's when it could be used perfectly. Or you're widowed, you're late 70s, early 80s, and you just like a little extra cash.
Pat: Don't do it to buy a new motorhome.
Scott: No. Or take your spouse off title because they're not 62, so you can do some cruises around the world. Let's go to Pennsylvania, talk with Chase. Chase, you're with Allworth's "Money Matters."
Chase: How are you guys doing today? Thanks for having me.
Scott: We're good, yeah.
Chase: So I don't want to...it's kind of a mouthful, but I'll give it to you guys as I can.
Chase: So my wife and I currently live in a 2,000-square-foot town home, with our 2 children, and we currently have one on the way.
Chase: So we've been in the talks... Appreciate you. Thank you. Thank you. So we've been in the talks of sort of, you know, getting a little more space for our growing family. And you know, the home that we currently live in now was purchased pretty much in, you know, a time where...
Pat: Interest rates were low.
Chase: Absolutely. So the rate we currently have now is 2.65. There is a mortgage and insurance on it though, with about $160 to $165 a month. But given a low-interest rate, it's still in a great place.
Pat: What's that value? What's the value of the home?
Chase: The value of the home right now is currently about 365k.
Pat: And what do you owe on it?
Chase: Two hundred and fifteen.
Pat: And why is there still mortgage insurance on it, PMI?
Chase: So I took out FHA, originally in... For FHA, it stays on through the life of the loan.
Pat: Oh, there's no way to get rid of it?
Pat: Okay. But even if you calculate...
Scott: So it moves the rate from 2.65 to 2.9.
Pat: So it's still a great rate.
Scott: Whatever. I mean, you can run the number, yeah.
Pat: And how old are you?
Chase: I'm 36.
Pat: And how old is your spouse?
Pat: And what is your income?
Chase: Combined, it'll be around between 250k to 300k, depending on some bonuses and things like that. A little more if you include the rental income.
Scott: What rental income?
Pat: I feel like I'm peeling an onion here.
Scott: Other than the million-dollar inheritance.
Chase: No inheritance, but we do have some rental income. We have, like, a beach home that we rent out throughout the year, and then there's another property as well that generates income, so around...
Pat: Are you sure you're just 36?
Chase: I'm positive, just 36. Just 36.
Scott: Okay. So what's the beach home worth?
Chase: The beach home is probably around 400,000. It's condo, but...
Scott: What do you owe on that?
Chase: Probably 140-ish.
Scott: What's the interest rate? Low.
Chase: Three point five. Right. Yeah, we got that maybe a year after.
Scott: And what's the other...?
Pat: Wait, one second, Scott, before we move to the other one. Cash flow, positive, negative, breakeven?
Chase: Cash flow, very positive. The only thing I would say is, depending on the renovations we do at the end of beach season, in our area, but the cash flow is positive, for sure.
Scott: And then you use it a few weeks a year or something?
Chase: As we can, or we just go down to kind of tighten things up. We take the kids down. The association has a pool and things, so the kids love it.
Scott: And the other rental.
Chase: The other rental is cash flow positive, around $700 a month. We haven't had a bad tenant experience so far throughout our renting experiences.
Scott: What's the value?
Chase: The value of that one, I would say around 100,000.
Scott: And what do you owe on it?
Chase: About 60,000.
Scott: Where can you have a rental house for 100,000 in the United States these days?
Chase: In the city of... That one's in the city of Wilmington, Delaware, yes.
Pat: And $700 a month positive cash flow. Wow. Did you ever live in that house, or was it always an investment?
Chase: It was always an investment.
Pat: Okay. So now what's your question for us that we have gotten most of Chase's financial? How much money do you have?
Scott: What are your major insecurities in life?
Pat: How much money do you have in IRAs and brokerage accounts and cash? Two different questions. How much do you have in IRAs?
Scott: 401(k)s and IRAs.
Chase: So 401(k) is about 170k.
Chase: Brokerage, and then I'll include, like, stock options and employee stock purchase as well there, about a total of 50k.
Pat: Okay. And cash?
Chase: Cash is about 130k right now.
Pat: Okay. And what's your question for us?
Chase: So I don't know if it's the psychology of it, but I'm trying to figure out whether I should, one, sell the home that we're in now?
Chase: Okay. Okay, because, I guess, in...
Pat: So here, so if you...
Scott: At the end of the day, you're trying to figure out, "How do I get out of this townhouse with two kids, I got a third one on the way, and go into a bigger place?" And you've got a mortgage of 2.65%, and mortgage rates are 7.5 now, and you're thinking, "How do I...?"
Pat: And how much would the new house cost you?
Chase: Six hundred to 650k.
Pat: Okay. So, you know, it's interesting, because there's two things that balance off here. One is, converting a primary residence to a rental property, you lose that benefit of you'd be better off selling it and buying the house, well, right next door.
Scott: Except for the interest rates.
Pat: Except for the interest rate.
Scott: It's a different game now than it was a year or two ago.
Pat: It's different. So if you had called us a year or two ago, we'd say...
Scott: Last 15 years.
Pat: Yeah, you know, like, it is the strangest housing market. So you, you know, do the math. I think you can afford a $600,000 home quite easily. You're going to avoid the PMI. You're going to pay an interest rate of 7%, 8%. But it's okay. You can afford it. And you're going to get the house you want. And overall, you're going to build your net worth.
Scott: We're not at all worried about your ability to save and invest.
Pat: Oh, my gosh, no.
Scott: I mean, I'm just looking at the stuff you've already got. And look, you've got a good wage, but we see plenty of people with this kind of income that there's nothing saved.
Chase: Right. Okay. That's good to know.
Scott: And the reason you've got these things is because you've been frugal, right? And that's why you're struggling right now, because it's going to cost you a lot of money to get a bigger house.
Pat: Yeah, you're looking at it, and you're like...
Scott: You're like, "Holy crap."
Pat: "My payment's gonna be, what, $5,000 a month, $6,000 a month."
Chase: Well, probably between, probably around 4 grand.
Pat: With the taxes and insurance, the whole bit in there?
Pat: You can easily.
Chase: Easily, okay.
Scott: So here's the thing. Here's the thing. From a financial standpoint, stay in your townhouse. If your goal is to die with as much money as possible or to retire as absolutely young as you can, then stay in your place. If, on the other hand, you're looking at this as more of a life-as-a-whole journey, and you don't want to necessarily die with multi-millions of dollars to pass to the kids, you want to have financial stability throughout your life but also enjoy things along the way, then absolutely make the move and buy the house.
Pat: What would the property rent for that you're living in now?
Chase: Twenty-four hundred to 2700.
Pat: And what are your payments on it?
Chase: Thirteen eighty-five.
Pat: There we go. Yeah.
Scott: Yeah. You're my younger brother. Actually, you're my kid. I'd say, absolutely, this makes tons of sense to me.
Pat: Yep. Yep.
Chase: Keep them by. Don't wait.
Pat: Yes. In this environment, with that interest rate.
Scott: Well, who knows? I mean, if you can find...
Pat: Wait, is that interest rate assumable?
Scott: The FHA?
Chase: I never looked into that.
Pat: Some of the FAHs are assumable.
Scott: I would look into that because you can get a tremendous premium for the place.
Pat: That's right. Because what happens...
Scott: At least look into it.
Pat: I would look into it.
Scott: But it's such a low rate. You've got other rentals. Your income, your jobs are stable? That's a question.
Chase: We're both in finance, so...
Scott: Not in mortgage, I'm taking it.
Chase: No, not really.
Scott: Don't tell me you're a real estate agent and your spouse is a mortgage broker.
Chase: We have the transferrable skills.
Pat: Okay, perfect, perfect, yeah. The only other thing I would look at is, if your mortgage is assumable, and I'm trying to remember if the FHA are, I cannot remember, your house would sell for a premium over market value. And then if you're really freaked out about it...
Scott: But you can always sell it later too if it's assumable.
Pat: That's right.
Scott: I don't think I would sell it.
Pat: I wouldn't sell it. I'm thinking out loud here, Scott.
Pat: No, you're fine.
Scott: And look, the reality is a home is going to be more expensive today than it was a year and a half ago when rates were low. That's reality. So if you're...again, it comes back to you can afford it. If your goal is to have as much money as possible, stay in this, or actually downsize, rent out the townhouse, find a one-bedroom apartment, and go, like, the smallest house you can or that $100,000 house in Wilmington. Yeah, right?
Pat: To Delaware.
Scott: And never go out to eat.
Pat: Okay, we got the point, Scott.
Scott: Buy your clothes at Costco.
Pat: Scott. I buy my clothes at Costco.
Scott: You don't have to tell me.
Chase: My wife is going to enjoy hearing you saying this. She's not listening.
Scott: So, you know, you probably have a great situation because you, by your nature, you are very frugal financially, you're probably a little worried about the future, which is that's why you've got a tight belt. And that's what's...you're like, "Oh, my gosh, it's gonna cost us much money. I don't know if I should do it." Your wife's probably more of, "Hey, let's spend a little." And you're probably gonna balance each other out a little. Is that a fair assessment?
Chase: Absolutely. Absolutely.
Pat: It's almost like we've seen this before.
Scott: You're going to be in great...
Pat: You're fine. You're fine. You're fine. You are absolutely fine. In fact, you're more than fine. This is, for a 36-year-old, holy smokes, you're crushing it. And as my kids would say, you're making the fat stacks.
Scott: Fat stacks. All right, Chase.
Pat: They used to say it. They don't say it anymore. They said it when they were in high school.
Scott: Did they, fat stacks? Chase, thanks for calling.
Pat: Thanks. Appreciate it.
Chase: Thanks for having me.
Scott: You know, Pat, it is the strangest time in the real estate market, because there are so many people... Now, he's got options because he's got other assets, he's got quite a bit of equity in his rental houses, and he's got a good income. But there's a lot of Americans, and this 30-year fixed rate is fairly unique to the U.S.
Pat: To the U.S.
Scott: A lot of countries, Canada doesn't have it, much of Europe doesn't have it.
Pat: They're all adjustable rate, most predominant.
Scott: Three or four, or five-year, and then they adjust. So I mean, you're looking at...the real estate volume is down quite a bit, but prices are stable. And on the high end, they continue to rise.
Pat: So, Scott, I came across this article in "The New York Times" that kind of leads into this.
Pat: Almost like it was planned, but it wasn't. So it talks about home ownership in the country of Switzerland. You think, "What do we care about Switzerland?"
Scott: Well, it's about the most expensive place in the world to live.
Pat: It is. It's very, very expensive. So the home ownership in Switzerland is 36% versus European Union. In the United States, it runs between 65% and 70%. You're like, "Well, why are people renting?" Well, because they can't afford homes. But those that do, that can afford homes, when you look at their wealth, years out, because of home ownership, by the age of 70, it's estimated that those people that owned a home, their wealth is 11 times...
Scott: Those that didn't.
Pat: That didn't. But then I'm thinking, well, part of it is self-fulfilling because...
Scott: Well, how much higher was their income?
Pat: Not only that, and it's actually because of the fact that they've owned a home, they've actually participated in the run-up in the market. But the point being is that, over the long term, if you're young over the long term, you are better off buying a home than you are renting. Now, in saying that, this has probably been the worst time to buy instead of rent. In this...
Scott: From a cash flow standpoint.
Pat: From a cash flow standpoint.
Scott: Yeah, I saw that article too. Where was it?
Pat: Right. So there's two conflicting articles. Well, one was, basically, just an analysis of Switzerland. But what intrigued me about it was the numbers of how wealth are built over time, buying versus renting.
Scott: Well, a couple of years ago, go back four years ago, pre-lockdown times, and you could buy a house, let's assume you put 20% down, you can buy a house, get a long-term interest rate, and your payment would be less than if you rented that house.
Pat: How many of those calls did we take on this program?
Scott: Today, across the U.S., it's 52% more expensive to buy a home than it is to rent because of the high interest rates.
Scott: Doesn't mean that's...
Pat: It doesn't mean that...
Scott: It doesn't mean you shouldn't be buying today.
Pat: That's right.
Scott: I mean, you shouldn't buy a house today if you're going to sell it in six months or a year.
Pat: But if you plan on staying there 5, 10, 15 years, homeownership always adds a hedge for inflation.
Scott: And if you can get to retirement with no mortgage, it gives you lots more options.
Pat: All the better.
Scott: A lot more options.
Pat: All the better.
Scott: Before we sign off, I want to let everyone know, Pat and I recorded the Art of Retirement a couple weeks ago at, wherever we were. Anyway, the two of us recorded it, and we are promoting this, launching this virtual event, the Art of Retirement virtual event, and it's where we'll share some of the most successful retirees that we've worked with over the last 30 years, some of the things that they've done to have rich and meaningful lives beyond their careers. And so, as part of this virtual event, you'll learn how to achieve prosperity beyond wealth. So we go to some different things, some good life-balancing techniques, and a ton of do-it-yourself apps for body and mind wellness and for budgeting and for a variety of things.
Pat: And over my 35-year career, I have given a number of workshops on different topics, and this is my all-time favorite.
Scott: Yeah, it's fun. I think you'll enjoy it.
Pat: Because it talks a little bit about finance people, purpose, right? Finance.
Scott: Prosperity and health.
Pat: And health.
Scott: We'll cover those four topics. And we're going to...these will be aired on Tuesday, November 14th at noon Pacific, Thursday, November 16th at noon Pacific, and Saturday, November 18th at 9 a.m. Pacific. And for more information and to sign up, allworthfinancial.com/workshops. Again, allworthfinancial.com/workshops. This has been all the time we can do today. We'll see you next week.
Man: This program has been brought to you by Allworth Financial, a registered investment advisory firm. Any ideas presented during this program are not intended to provide specific financial advice. You should consult your own financial advisor, tax consultant, or a state planning attorney to conduct your own due diligence.