Home is where the wealth is. Advisors discuss home prices and financial planning

They say home is where the heart is, but it’s also where the wealth is since a home's equity is often the largest asset for US households.

U.S. single-family home prices stayed unchanged in May and the annual increase was the least in nearly a year due to higher mortgage rates and increased supply, according to a Tuesday report from the Federal Housing Finance Agency. The average rate on a 30-year fixed mortgage reached a six-month high of 7.22 percent in early May.

The unchanged reading in home prices followed a 0.3 percent month-on-month rise in April. Going back over the 12 months through May, house prices rose 5.7 percent which was the smallest year-on-year advance since July 2023 and well below the 6.5 percent gain in April, the report said.

So what is a financial advisor to do when home prices cease to go up? Or at least not go up as quickly as they used to?

When it comes to financial planning, Josh Strange, president of Good Life NOVA, says he looks at a person’s primary home as more of a “use asset” than a financial asset until a decision has been made to sell it, or a definitive sale date has been established. After that, he treats it as an income inflow and plans accordingly.

“We do, of course, account for it on a balance sheet and make sure rising or falling values are reflected accordingly,” said Strange.

He also closely watches the home’s value for estate tax planning purposes, especially in light of the upcoming TCJA sunset at the end of 2025.

“One thing I tell clients though is never bank on a real estate windfall and always plan very conservatively on return rates on their primary home. That way if we get a surprise, it is usually on the upside,” said Strange.

Similarly, Roshan Weeramantry, partner at Helium Advisors, always incorporates a client’s home value into a financial plan. In his view, it’s important that clients understand their own “bigger picture” so they understand all the options they have as they think through retirement and passing assets to the next generation.

“Many of our clients are based in California and the largest asset they have is their home,” said Weeramantry. “To help our clients think through different retirement possibilities we like to walk through ‘what-ifs’ to show them the impact of downsizing to a smaller home and potentially using the difference to supplement retirement income.”

Meanwhile, Adam Paffenroth, owner of Cornerstone Private Wealth Planning at Stifel Independent Advisors, closely eyes fluctuations in client home values as it may affect property taxes and mortgage decisions.

“If a home’s value is rising for example, it may be appropriate to review certain strategies like refinancing to take advantage of increased equity or leveraging a property’s value for new investments or retirement planning,” said Paffenroth.

“Conversely, if a home’s value is falling, I focus on maintaining sufficient liquidity and ensuring a diversified investment portfolio to mitigate risks. By regularly revisiting and adjusting a financial plan, we ensure it stays aligned with a client’s personal goals and the evolving real estate market,” Paffenroth added.

Before diving into market values, Paffenroth believes it's crucial to connect with clients on a personal level to understand their long-term financial goals and how their home fits into this vision. Given that a home might represent 50 percent or more of someone’s net worth, he says his first priority is “protection,” which includes having the right insurance coverage and reviewing estate planning documents.

“Many clients want their home to be part of their legacy for their children. In these cases, discussing updates to estate plans and asset titling is essential,” said Paffenroth.

Katy Song, chief financial planner at Domain Money, adjusts the value of client homes each year depending on the current market value for their net worth calculation. Nevertheless, since her clients do not tend to trade houses often she says periodic decreases in home values are not “very material” in evaluating a client’s net worth progress year over year. 

“To weather market ups and downs, I recommend that my clients only purchase properties they intend to hold for at least 5 to 7 years. Given higher interest rates, owning a new home can cost nearly twice what it did a few years ago,” said Song.

For those looking to improve their homes in these inflationary times, she recommends sticking to1 percent of the value of their home per year in home-related investments.

“So, if you want to do a $100,000 kitchen remodel, make sure it fits into that rule and that you plan to stay in your home long enough to recoup the investment,” said Song. 

For his wealthier clients, Andrew Schiff, partner at Triton Point, uses their primary residence or vacation home as a core tool for estate planning process.

“Whether it’s creating a Family Limited Partnership to own a highly appreciated ski house or a QTIP Trust to own the family’s home, moving personal real estate into a trust structure will often lead to lower estate tax liabilities down the road, especially when coupled with the customary valuation discounts often associated with real estate,” said Schiff.

Elsewhere, Brian Schmidt, manager of financial planning support & advanced case solutions at Avantax, says no matter where prices go, it boils down to a couple of choices: stay put or sell.

“If clients are going to stay in their home, it’s great if they can have their mortgage paid off prior to retirement because that creates a lot of financial freedom regardless of housing prices. For those who don’t plan to live full-time in their house, renting it out can provide another source of income while allowing for flexibility later,” said Schmidt.

“For those who plan to sell, we can use the financial plan to show how that equity can be invested to help cover rental costs or new home acquisition costs. We can also simulate different times for a sale to occur, thus showing clients how their cash flow is impacted,” Schmidt said.

Finally, John Mosher, partner and vice president at Unique Wealth, reminds clients that trying to time real estate values – just like stocks - in the short term is typically not recommended. 

“Location, location, location!” said Mosher. “Buy the home that suite’s your needs, doesn’t cramp your cash flow and if you plan to live there long-term often you are rewarded with growth in value.”