The Two Things You Should NOT Purchase Right Now, Ep #47

What two things should you avoid purchasing in the near future? Why should you wait? In this episode of Retirement Made Easy, I talk about real estate, annuities, and CDs. Why do they all make poor purchases right now? Listen to this episode to learn more! You will want to hear this episode if you are interested in... [2:58] Thing #1: Avoid buying real estate [4:48] Why home prices have skyrocketed [8:09] Thing #2: Avoid purchasing CDs and Annuities [11:48] Annuities: the good, the bad, and the ugly Thing #1: Avoid buying real estate There is a real shortage of supply of housing. The competition is so ridiculous that it's driving the prices of homes up 10–30% more than the asking price. People are even paying 10–30% more than what homes are appraising for. It's a bad idea to pay 10–30% more than the house is worth. Lenders are pointing out that people are going to regret making these large purchases as the inventory of homes rises in the next 12–24 months. Home prices will start to level out again. Why are real estate prices skyrocketing? What can the current real estate market be attributed to?  The supply shortage. Lumber manufacturers were shut down for months because of COVID, the cost of lumber skyrocketed, and building a new home became ridiculously expensive. This places all of the demand on the used home market, and the supply just can't keep up with the demand. Not only that, but some people aren't putting their homes up for sale because they're worried they'll have nowhere to go when it sells.  The other factor is that interest rates are low. Many people are getting approved for a home loan they wouldn't otherwise be approved for. You're better off waiting so you don't have to pay 30% than the appraised price on a home. It doesn't financially make any sense. Wait until the inventory of homes increases and the price of lumber decreases. The Fed plans to keep interest rates low for the near future, so there is still time. Thing #2: Avoid purchasing CDs and Annuities Why should you hold off on these purchases? I always recommend that you go to Bankrate.com to gather information. Simply click on "Banking" and "CD Rates" or choose "5-year CD Rates" to get an idea of what a 5-year CD would pay. Right now, a 5-year CD would pay in the area of a whopping 1%. I don't like seeing someone lock their money into a CD or annuity while interest rates are at all-time lows. What you earn is a lot less than if interest rates were a lot higher. We expect rates to be a lot higher in the future—so wait. Now is also not the time to put money into an annuity. Insurance companies move the interest rates down as interest rates go down. March 15th, 2020 is when the Fed cut interest rates to zero. Banks and insurance companies cut the interest rates they were paying a lot lower, immediately. They aren't in the business of losing money. Insurance companies base annuities off the 10-year treasury, which plummeted to 0.05% interest in March 2020. Annuities: the good, the bad, and the ugly I think annuities tend to be misrepresented and confusing because they can be complex. Annuities are offered through life insurance companies in the form of a contract. They send you a booklet that explains the annuity. Another disadvantage is that they're meant to be long-term investments, ranging from 5–15 years. If you don't hold the annuity for that length of time, you have to pay a surrender penalty.  Annuities can also be very expensive. You can add riders that add extra expense (such as a lifetime income benefit, return of principal benefit, or even a death benefit). The more bells and whistles you add, the higher the price will be.  You need to understand what you're getting (or what you own) and why it's appropriate for you. Do you want lifetime income? An annuity can act like a pension that's guaranteed by the insurance company. That means you need to understand the longevity and the strength of the insurance company. Fixed annuities can pay an interest rate, almost like a CD. You might be able to earn higher interest than a CD.  What is an advantage of annuities? Most offer tax deferral. So as the money grows in the annuity, it is all tax-deferred. Annuities are becoming more and more popular inside of banks.  If you do want to make an annuity part of your overall portfolio, make sure you understand what you're getting yourself into. Annuities are a tool—you just need to make sure the tool is appropriate for the job. Learn more about the topic in this episode of Retirement Made Easy. Resources & People Mentioned Bankrate Connect With Gregg Gonzalez Email at: [email protected]  Podcast: https://RetirementMadeEasyPodcast.com Website: https://StLouisFinancialAdvisor.com Follow Gregg on LinkedIn Follow Gregg on Facebook Follow Gregg on YouTube Subscribe to Retirement Made EasyOn Apple Podcasts, Spotify, Google Podcasts