The Covid-19 pandemic has yielded a number of unusual consequences, one of which is a real estate boom. Homes in suburban and vacation areas, where people can comfortably social distance and work from home, have been in high demand, and prices have risen accordingly.
“Working from home has become everybody’s new norm. Clients are really rethinking where they want to live,” says Erin Gorman, National Head of Mortgage Solutions at BNY Mellon Wealth Management.
Many high-net-worth individuals think that being in the office five days a week is no longer critical, even when the pandemic ends. That’s freed up people to move away from urban locations.
“On both coasts, they’re buying in high-end resorts, waterfront properties in places such as the Hamptons, Nantucket, Palm Beach, Newport Beach,” says Gorman. “We’re also seeing them buy in high-end ski resorts and ranch-type resorts in places like Lake Tahoe, Nevada; Park City, Utah; and Whitefish, Montana. And we’re seeing this as a continuing trend in 2021.”
Despite rising prices, demand continues for second homes, vacation homes and suburban properties because interest rates are so low. For high-net-worth individuals who don’t need to borrow to buy a home, the low rates present a quandary: To borrow or not?
Low interest rates present an opportunity for affluent individuals to use leverage to their advantage. Buyers can keep their cash invested in the stock market or other investments, and borrow at historically low rates to purchase additional homes.
“Our clients oftentimes don’t need to borrow—they have sufficient liquidity. But if you can borrow at a lower rate than you can earn through investing your money in the market, there’s a potential arbitrage right there,” says Andrew Seiken, Senior Wealth Strategist at BNY Mellon Wealth Management. “From last March to this March, the markets have gone up over 50%. But if you sell investments and put cash into real estate, there may be a tax associated with that sale and typically real estate doesn't have the growth potential that the market does over time,” he says. “Savvy clients and savvy investors understand and think, ‘Would I use my own money?’”
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