Ilyce Glink: The State of Real Estate Today

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On the podcast today, we welcome back real estate expert and author Ilyce Glink. Ilyce writes a nationally syndicated column on real estate matters, and she has written more than a dozen books on real estate and homebuying, including 100 Questions Every First-Time Home Buyer Should Ask, which is now in its fourth edition. She is also a regular contributor to WGN Radio. In addition, she is founder and CEO of Best Money Moves, an award-winning financial wellness company that helps employees of more than 1,000 companies to improve their financial wellness and reduce financial stress. Ilyce received her bachelor’s degree in English literature from the University of Illinois at Urbana-Champaign.

Background

Bio

WGN Radio

100 Questions Every First-Time Home Buyer Should Ask, Fourth Edition, by Ilyce Glink

Best Money Moves

“Ilyce Glink: The State of the U.S. Residential Real Estate Market,” The Long View podcast, Morningstar.com, June 28, 2022.

State of the Housing Market

“Home Prices, Rents Will Continue to Rise With Short Supply of Houses on Market, Analysis Finds,” by Ilyce Glink and Samuel J. Tamkin, Washingtonpost.com, July 28, 2021.

“Homeowners Don’t Want to Sell, so the Market for Brand-New Homes Is Booming,” by Nicole Friedman, wsj.com, July 19, 2023.

“Love, Money + Real Estate #014,” by Ilyce Glink, glink.stubstack.com, May 3, 2022.

“2023 Home Buyer Resolutions,” by Ilyce Glink, thinkglink.com, Dec. 26, 2022.

“Want to Buy a Home? Good Luck. We’re 4 Million Homes Short,” by Ilyce Glink, thinkglink.com, April 20, 2021.

“Underbuilding Has Led to ‘Acute Shortage’ of Housing and ‘Affordability Crisis’ Study Says,” by Ilyce Glink and Samuel J. Tamkin, Washingtonpost.com, July 19, 2021.

“Real Estate Trends for 2022,” by Ilyce Glink, thinkglink.com, Dec. 14, 2021.

“Advice for a First-Time Homebuyer in 2023,” by Ilyce Glink and Samuel J. Tamkin, tribunecontentagency.com, Feb. 7, 2023.

Rental Properties

“Real Estate Matters: Homeowner Weighs Renting vs. Buying for Next Stage in Life,” by Ilyce Glink and Samuel J. Tamkin, heraldtribune.com, Aug. 8, 2021.

“Is It Better to Rent or Own Your Home in Retirement?” by Ilyce Glink, thinkglink.com, Dec. 11, 2020.

“Should Rental Income Be Part of Your Retirement?” by Chris Taylor, aarp.org, Aug. 1, 2022.

The Home as an Investment

“Capital Gains Tax on Inherited Property?” by Ilyce Glink, thinkglink.com, June 28, 2023.

IRS Publication 523: Selling Your Home

“Ramit Sethi: Investing Shouldn’t Be Your Identity,” The Long View podcast, Morningstar.com, June 6, 2023.

“JL Collins: The Case for Simplicity,” The Long View podcast, Morningstar.com, April 5, 2022.

(Please stay tuned for important disclosure information at the conclusion of this episode.)

Transcript

Christine Benz: Hi, and welcome to The Long View. I’m Christine Benz, director of personal finance and retirement planning for Morningstar.

Jeff is on vacation, so I’m doing this one solo. On the podcast today, we welcome back real estate expert and author, Ilyce Glink. Ilyce writes a nationally syndicated column on real estate matters, and she has written more than a dozen books on real estate and home buying, including 100 Questions Every First-Time Home Buyer Should Ask, which is now in its fourth edition. She is also a regular contributor to WGN Radio. In addition, she is founder and CEO of Best Money Moves, an award-winning financial wellness company that helps employees of more than 1,000 companies to improve their financial wellness and reduce financial stress. Ilyce received her bachelor’s degree in English literature from the University of Illinois at Urbana-Champaign.

Ilyce, welcome back to The Long View.

Ilyce Glink: It’s nice to be here with you, Christine.

Benz: It’s great to have you here. So, it’s an interesting time in the real estate market. That’s why we wanted to have you back, because people have lots of questions, and of course, this is a big part of their financial lives—what they’re doing with their homes and home buying and so forth. So, we want to start by discussing the current environment for residential real estate. We’ve seen a big jump in mortgage rates since you were last on the podcast, which I think was last summer, and that would seem to be a negative for real estate. I think everyone was bracing for prices to go down, but it seems like the market has been pretty resilient. So, I’m wondering if you can talk about what’s going on there.

Glink: The big story is that there’s nothing to buy, so we’re back to what I think would be economics 101. When you have nothing to buy and it’s a scarce resource, prices tend to go up. And in this case, they went up a lot, and now they’re just holding steady or still inching upward. And I think that’s very frustrating for the vast number of people who could afford to buy if there was only anything on the market. But you go to neighborhood after neighborhood, and there might be one house or no houses. Builders are happy, and I’m sure you’ll want to ask about that, but new construction is going. But the problem here is new construction takes a while to assemble the land parcels and get the zoning and get your design stuff done and hire the builders and get everything. It just takes a while. And when you have an existing house for sale around the corner, you could close and move in in eight weeks or six weeks or, in some cases, immediately. And that’s just missing in the marketplace.

Benz: Let’s talk about the low inventory. Is it mainly just that people have mortgages, often with very low rates relative to what are available now? So, the idea is, I’m sticking with what I have rather than risk going out on the open market and needing to get a new higher-rate mortgage. Is that the main thing in play?

Glink: I think that’s one of several things in play. So, the first thing, obviously, interest rates are touching 7%. And in some cases, if you have a 700 credit score, which is the average in this country, 7.5% some weeks. Sometimes it’s 6.5%. Sometimes it’s 7.5%. But it’s bouncing in that range. And the vast majority of people, somewhere around 90% or 92%, have mortgages under 5%. And even a large portion of them have mortgages at around 4% or less. Well, when you have got that, and you’re in your house, and you’re living happily, there’s got to be a tremendous force that pushes you to move and give up that interest rate. And I think that, for many people, they haven’t figured that out yet. So, they’re staying put, renovating where they can. And that just means there’s fewer homes for anybody to buy.

Benz: You mentioned the new-home market, the homebuilding market. I was just reading an article in The Wall Street Journal today about that issue, about how they’re booming. Can you talk about that, how people who aren’t finding existing homes are looking at new homes?

Glink: I think a lot of people like the idea of buying a new home because it’s new, and it’s got all the modern things that you see on HGTV every day. But the truth is there are trade-offs when it comes to new homes. Sometimes that’s location. Sometimes it’s school district. Sometimes it’s just the size of the home that you can buy. They’re more expensive. There’s a lot of different things that are going into making homes more expensive, new homes. Some of that is labor costs. A lot of that has to do with construction materials, many of which got caught up during the pandemic. Prices went up. There’s also competition for those materials. We have had a massive hurricane, lots and lots of storm damage, flood damage all over the country, wildfires. People have to rebuild. And there’s just a limited quantity of the materials that they need and a limited quantity of the people who are able to do that rebuilding. And so, all of that has put into making new homes more expensive.

I was touring San Diego a couple of months ago, and I was simply astonished at the prices that are being asked and received in that community. Condos that are going for $1,000 to $1,200 a square foot, that’s New York prices or was New York prices. But single-family homes or brand-new town houses near UC San Diego are going for $1.3 million to maybe, I don’t know, over $2 million in excess of $1,000 a square foot. And so, we’re seeing those prices in markets that normally wouldn’t have commanded it, and it’s kind of shocking.

Benz: Can you talk about geography a little bit more, what you’re seeing in terms of geography? We’ve had this move of people toward the Sun Belt-type states, moving away from the big urban locations in the Northeast and to some extent in the Midwest, like Chicago. Can you talk about what we see in terms of geography?

Glink: The big story there is that people are moving to the Southeast and, for whatever reason, still moving to the coasts. Everybody wants a water view. Pretty soon we’ll have lots more of those, I think. But in any case, we’re seeing a lot of movement to the South and Southeast. We’re also seeing, and we saw this during the pandemic—it began right away, March of ‘20, people were fleeing cities and trying to move to somewhere rural where they had more space. And so, you saw it up and down the housing food chain. People in studios moved to one or two bedrooms. People in one or two bedrooms moved to the suburbs into a single-family house. If you were in the suburbs, that might not have been enough space, you moved to a bigger house. You moved to a rural area. And we’re seeing some of those people come back now, but a lot of times they aren’t coming back. And what they’re doing is they’re staying, they’re building their lives in a different place, taking advantage of remote working, which became a thing three years ago, and very happily doing that. And so, we’ve seen an interesting shift in how people are living their lives and what’s very important to them. And I think that’s causing a lot of consternation for owners of large office towers. And I know you’re going to want to ask about commercial building. We can do that, too. But also, for owners of companies who might prefer to have everybody in-house.

Benz: You just referenced climate change, Ilyce, in your last response. I want to delve into that and its repercussions for housing prices. We’ve seen, just this summer, record heat in some parts of this country, and most of the big insurance carriers, as far as I understand it, have pulled out of Florida. So, at what point, or are we already seeing climate change have a meaningful impact on the property market?

Glink: I think it’s already happened, and it’s just beginning. So, you’re right about Florida. Most of the major insurance companies have pulled out. Florida itself, the state, is now backing the insurance, homeowner’s insurance, for these properties. And my friends and colleagues and family who are in Florida aren’t quite sure how long that’s going to last, because even though Florida is doing quite well, you just get another hurricane barreling through, and that could wipe out $10 billion, $15 billion. So, we’ll have to see what happens there. But you’re right about climate change. Arizona has put the kibosh in any new building unless builders can show that they have a 100-year supply of water. That’s hard to do when all your water is coming from the Colorado River, or it’s being sucked up by fields of alfalfa going to feed cows living in the Middle East. So, you’re seeing some things go on there.

Out in California, you’re having an issue with wildfires, although it’s been quiet this last year, and they had a tremendous amount of rain and snow. But on the flip side, there’s worry that we’re going to start to see flooding due to all that snow start to melt. We had some friends whose daughter got married in Utah in June, middle of June, on a mountaintop, and they had skiing. They had somebody ski in to do her wedding, because there literally was nine feet of snow on the mountain in the middle of June. And so, you’re seeing just odd weather patterns everywhere, and it does start to affect how people buy, sell, and live in their homes.

Benz: I want to ask, going back to the tight market, the fact that there’s no inventory, I wanted to ask about the role of cash buyers in this environment, so people who are forgoing mortgages altogether. To what extent is that a feature of the current market, and is that different from past periods of rising rates?

Glink: We are seeing quite a lot of cash buyers. A couple of years ago, they were investors looking for rental properties. And you’ve got a large and growing contingent of companies like private equity, venture-backed groups, hedge funds buying tracks of houses that they keep and rent out to people. They were paying cash, as prices were starting to rise. But today, you’re seeing mom-and-pop investors, and by that, we typically mean people who own three to 10 properties, figuring you live in your first, your second might be a vacation home, and then everything above that, you’re a rental investor. They’re coming to the table with cash, which is interesting. You’re also seeing people who are downsizing or maybe don’t have mortgages anymore, taking their money out—you’re seeing a little bit of downsizing. Strangely, though, you’re also seeing upsizing, and I think some of that has to do with the fact that so many kids came home, and by kids I mean people at college who were struck with the pandemic issues, and they couldn’t go to class, and they were locked in their dorm rooms, and so they came home. But also young adults, young millennials in their 20s also came home, and parents thought, oh, why am I downsizing? I might need to upsize. I need room for all these adults, and I don’t want to share a bathroom with them. And so, you did see a trendline of homes that had five-plus bedrooms become a hot commodity, and so that’s continuing. We’re also seeing multigenerational households continue to grow, and part of that is again due to the pandemic. You had mom and pop and kids come home, and then you had the grandparents who needed somewhere to go and have somebody take care of them—everybody living together, you just needed a little bit more space.

Benz: I’m wondering if you can discuss whether the trends that we’ve been talking about really hold true across housing, or are there parts of the market that are doing better or worse? So, for example, luxury homes relative to starter homes. Any trends to observe on that front?

Glink: Well, if you read The Wall Street Journal, it would seem that only $50 million-plus houses are selling. It’s very regionalized in some ways. In Los Angeles, all of California, there was a new law that was just passed and went into effect that if you sold a home—I think this was LA law—if you sold a home for $5 million or more, there was an extra tax that had to be paid. And so, you saw a dearth of homes sell for like $4.999 million, which was kind of funny. In Chicago, which really has been the bargain basement in terms of growth, you’re finally seeing prices go up, just as in places like Boise and some other property markets that got way overblown, you’re seeing some housing prices come down there. At the upper end, I think you’ve seen more housing prices diminish. Again, not a lot—5%, 8%, 10%—simply watching people with large sums of money just sit on the sidelines. But that wouldn’t hold true, of course, in places like Miami, which, wow, Miami, Scottsdale, some of these marketplaces where you’re seeing basically every new home built is $4 million to $5 million. So, it’s interesting to watch the regionalization and how it’s changing.

Benz: I wanted to get your advice. You have a book that has been such a hit for you for many years, and you’ve revised it many times, but it’s a book geared toward first-time homebuyers. So, how about your advice for people in this market who are buying their first home? Is it safe to assume that rates will trend down, even though they might be buying in at relatively high rates today?

Glink: I think it’s safe to say that interest rates will be down maybe not until the second half of next year, certainly by 2025. And the reason I say that is because the Fed has done its job, and inflation has dropped from a high last June of 9.06% to 2.97% at the end of this June. That’s a dramatic drop. And so, interest rates went up to try and quell inflation, and I think it’s done a decent job of doing that. The Fed itself has just come out this week and said, this is probably going to be the last rise. And so, I think there’s a lot more opportunity on the downside, meaning that if it’s not going up any higher, it’s probably going to start coming down. And so, you’re hearing experts, and I’m sure you’ve talked to them, about how locking in bonds now could make them more valuable as the prices change. Same thing with mortgages. You can get a 30-year fixed loan. You could get a five-year adjustable-rate mortgage. And when interest rates go down, you can just refinance. So, I think for first-time homebuyers, figure out what you can afford, go try and find that house, be competitive about buying it, and get moving, because I don’t see home prices going down anytime soon.

Just underpinning all of this is the fact that we have a shortage in this country of houses somewhere still around, depending on who you ask, between 5 million and 6.5 million houses that were short. And so, if you’re short on housing, then prices, just to go back to where we started, prices probably aren’t coming down anytime soon. So, if you buy now and you’re buying for the long run, that’s a good thing.

Benz: Well, one of the really hard things for young people in this economy looking for housing is that they’ve been getting squeezed on the rental front. Rents have been skyrocketing. So, can you talk about that dimension of all of this? What we’re seeing in terms of rentals?

Glink: Absolutely. The good news there for people, and I do like to think of this as being good news, is that rents are actually going down. Now, the numbers don’t show that yet, but the numbers that we quote for rents going up—and they did jump up dramatically, no question about it—but the rental increases going forward are going to be a whole lot less. And so, that is good news for renters, but that doesn’t take away the pain that they’re all feeling today, and I get that. It’s been very, very expensive for people renting. And if you rent, you typically have less in terms of financial resources. So, you’re renting because you can’t afford to buy or you can’t find the right place or maybe your credit is not good, and so you’re paying more than perhaps you want and you’re not building any equity. But that said, there are very valid reasons to rent. There are a lot of Gen Z millennials who aren’t ready to buy, don’t know where they want to live, aren’t ready to move to rural areas, or even buy a house somewhere. And so, renting becomes the thing that you have to do.

And I think that’s really tough because you fall to a degree into the lap of the landlord and what they’re willing to do for you or the expenses that they have to pay, which also have gone up for maintenance, for materials, for replacing appliances. So, I think what we’re going to see over the next six months to a year is that rental increases have come down quite a bit. I don’t think we’re going to see a decrease, though, in overall rents. It just won’t go up as fast after this, but that will be expensive and hopefully people are getting enough of a raise in their incomes to help cover some of those costs.

Benz: Going back to mortgages, I wanted to ask about the types of mortgages that you’re seeing people take out. You referenced adjustable-rate mortgages. Are we seeing them become more popular as rates have gone up?

Glink: We are, but you’re not getting a great break on the price. People are doing it because they’re getting a little bit of a break, and so that’s good. But you’re not seeing the same kind of loans. I’m starting to see loans, instead of just going up every year, every six months the rate might adjust. If you’re going to go into an adjustable-rate loan—my house is paid off now, but I had them for the last 25 years and I did very well by having them—I think you can do well because you just refinance when interest rates drop and then you’re locked in. They’re also limited to how much they can go up in any one year. So, you get some upside protection.

The vast majority of homes, though, are now being financed with 30-year mortgages. While you could save more with a 15-year, again, it’s not enough of a short-term versus long-term interest rate to really save you that much money. So, for anybody buying, you probably want to talk to a lender, a couple of different kinds of lenders, about the loan programs they offer, whether an adjustable is going to be better for you than a fixed. Really at the end of the day, Christine, and you know this very well, it’s all about what lets you sleep at night, and for some people, not having a fixed loan makes for a very bad night’s sleep.

Benz: I wanted to ask about recommended holding period for homeowners, and I think this might be especially important for new buyers who maybe have some uncertainty in terms of where they might work or where they ultimately want to live. Can you talk about whether home purchasers should have a recommended holding period for that home in order for them to build equity or at least emerge whole at the end of the transaction—if they need to sell, that they’re not forced out and need to take a loss on that property?

Glink: Typically, you had to stay in your house for at least five years in order to break even when you sold it, and that’s because there are some obvious costs of sale. You have the cost of advertising, marketing, you’re paying the broker. Typically, brokerage companies now also charge doc fees, doc preparation fees that could run you $600 or $800 or more. You’re going to pay the attorney if you live in certain states, you’ve got title. All this kind of stuff really adds up, and with moving costs, you could end up with somewhere around 10% of the sales price.

For a long time, though, people were making so much money in their houses, they weren’t staying very long at all. They were saying, five or six years on average or even three to four years. But today, people are now staying in their homes a lot longer. And in fact, 47% of Americans have lived in their homes for six to 10 years, 35% have lived there for 10 to 15 years. And so, the median that people are staying in their homes right now is 13.2 years. That’s an increase over the last decade of three years. And what’s nice about that is that you will come out cash positive. If you’ve been paying down your mortgage, even if you haven’t been prepaying, you’ve just been paying it down, that’s built-in equity and the price has gone up at the same time. And in fact, the number that I saw today for foreclosures is down to, I think, an all-time low, because people have equity in their houses. So, if you have to sell because you lose your job, and nobody is losing their jobs too much right now, but if you did have to sell for whatever reason, you’ve probably got a huge pot of equity that’s built up. And so, that’s actually contributing to the financial stability for homeowners right now across the country.

Benz: I wanted to ask about that, Ilyce, because I saw some research about how a lot of the wealth in this country is home equity. It’s home-related wealth. Is it simply that wealth is harder to touch than it is with our liquid investment accounts that you just have to sit with it and let it grow? Of course, you can tap that home equity, but do you think that’s why people at the end of their lives oftentimes end up with a lot of their net worth in housing wealth?

Glink: I do. I think it’s hard to spend an illiquid asset. Something that’s locked up and you’re just contributing to it and contributing to it, it stays there. So, the only way that you would be able to tap into that is with a cash-out refinance or if you take out a home-equity loan or a line of credit. And a lot of people don’t seem to do that. They do it for big things. You might do it because you’re renovating your kitchen, for example. But if you don’t do it, then that pot just grows and grows and grows. And as your home increases in value, it gets bigger and bigger. So, I think that when you read things like 70% of a family’s net worth is in their home, I think that’s really an important thing to recognize. And it’s good because if you do pay down your loan and you get to the end of it and then you retire, you really improved your cash flow situation, which is nice, because you just want to conserve when you’re in retirement. But what we’ve seen is that there’s a fair number of baby boomers who have taken out very large loans when interest rates were low. So, you could argue 2% mortgage is like free money, but OK. But they took those out and then they’ve spent that money and now they’re going into retirement, and they’ve got a decent-sized nut to pay back. And that can be problematic for seniors.

Benz: What about lending standards today? What are banks doing in terms of maintaining lending standards, especially with at least the threat of recession? Are they pretty tight today, would you say?

Glink: They are. I think what we saw 15 years ago in The Great Recession, and I can’t even believe I’m saying it was 15 years ago.

Benz: I know.

Glink: Where did that time go? What happened is lenders really tightened their standards. So, we got rid of pretty much negative amortization loans. We got rid of these stated income loans like, I’m just going to tell you what I make and it’s nowhere close to the truth.

Benz: The liar loans, right?

Glink: Exactly. We got rid of all of those. And so, it really allowed banks to tighten their standards and increase the credit quality. And so, now when you look at these pots of mortgages, mortgage-backed securities, they’re really high quality. And you’re, again, not seeing a lot of people foreclose, you’re not seeing a lot of people not stop paying. That happened obviously with the pandemic, but we already knew institutionally how to handle something like that because we did it 15 years ago. And so, thanks to the government, and assistance, and cash that flowed in, we kept most people from going under with their mortgages, and that was really helpful.

Benz: I’m wondering if you can talk a little bit about taxes. And specifically, I wanted to delve into capital gains taxes as they relate to property appreciation. Can you talk about that? I think many people might not understand how that works and also the importance of accounting for actually the money you’ve put into your home and making capital improvements and using them to potentially reduce the likelihood that you might owe capital gains upon sale.

Glink: First of all, if you have lived in your house for two of the past five years, you’re entitled to keep up to $0.25 million in profits tax-free, which is really great. And if you’re married, you’re allowed to keep up to $0.5 million in profits tax-free. Anything over that, and that’s going to be subject to capital gains tax. But there are some ways to ameliorate that a little bit. One is you’re allowed to reduce your overall profit with your cost basis. So, the amount that you paid for the home, the cost of purchase, any material improvements you made to the house, did you add on to it, did you put a new roof on, you had to redo the plumbing. And then, of course, the cost of sale—the brokerage commission, transfer taxes fees, whatever it is. All of that gets added together, and you subtract that from the sales price of the house, and that’s how you come up with your actual net profit. And I know that prices, that amount—$250,000 and $500,000—have stayed the same for a long time, and some communities have seen property prices just zoom, but so it goes. If you sell—and this may be another reason why people aren’t selling; I don’t think we have data on that exactly—but if you’re looking at a big tax bill because suddenly you’re going to have $750,000 of profit, and you’re only able to shelter $0.25 million, well, I can see why some people may not want to pay that bill.

In addition to a regular capital gains tax, you might also trigger that Medicare tax, which is I think 3.1%. And so, a lot of people don’t want to pay that either and then of course, there may be state taxes as well. And so, you really want to think about that and making that move in a very smart way, because of course, you want to minimize the amount of taxes you pay legally. And there’s a brochure called “Selling Your House” that the IRS puts out, it’s Publication 523, and you can get it online at IRS.gov, and it goes through all of the allowable deductions as you’re working on your cost basis and adding up all the things, and what you need to do to be able to take the right amount and create the right number for your cost basis and capital gains profit.

Benz: Can you home in on that just a little bit more? It sounds like, or at least my understanding is, that maintenance costs are not part of the capital improvements, right? It needs to be something that adds to the value of your property, is that right?

Glink: Yeah, that is. For example, decorating doesn’t count, even if it’s wonderful. Paint and carpet don’t count; but replacing your windows might, replacing the roof would count. I think buying new towels for your master bath do not. So, a lot of things count. And again, the Publication 523, “Selling Your Home,” does list everything out in quite a bit of detail. And then, the other question is, what can you prove that you actually spent? And so, for people who have been in their houses for 30 years, unless you have a file and every single receipt went in there from every contractor, some of this is going to be left to memory, or you’ll have to prove it with checks that were written or credit card statements, things that not everybody has, if you get audited. But you do want to be very careful and not cross that line. If the property is an investment property, there’s an entirely different set of rules about cost basis and how that all plays out, and you probably want to talk with your accountant about what counts, because there decorating would count. If you have to stage your home for sale—we got this question for our syndicated column a couple of weeks ago—if you stage your home for sale and it costs you $5,000, is that a cost of sale? The IRS is silent on it, but I would argue, yeah, that’s a good cost of sale. So, it just depends.

Benz: Do you have any favorite tools for tracking those expenses, or do you think people should just use an Excel spreadsheet and try to document them that way?

Glink: I think documenting it on an Excel spreadsheet is fine. You could write it out on a piece of paper as long as you’ve got some receipts and you can prove it. I don’t think it has to be fancy. Again, this is just if the IRS comes knocking at your door and something doesn’t look right. But I know a lot of people who just keep these expenses in a file folder, and when they go to sell, they go flip through it and go, oh, yeah, I forgot I did that. Because we remember the big things, but you may not remember that you had to replace your underground sprinkler system, for example, three times.

Benz: Right. Things can be painful.

Glink: Yes, exactly. We ended up replacing our roof a couple of times in all the years we’ve lived in this house, but we only paid it once, and then the rest, the contractor had to pick up that bill.

Benz: Periodically, this conversation bubbles up about whether there should be tax incentives for homeownership, like this capital gains exclusion that we were just discussing or like the mortgage interest tax break. Can you talk about that and your perspective on that, about whether we should be incentivizing homeownership in this way?

Glink: It’s a great question. It’s so political because the reason that we incentivize it is because research, probably funded by political parties—both sides, by the way—has shown over the years that people who own homes stay longer, they make more investments into the community, they support school districts, and they support the local community initiatives, and they tend to vote more often. So, there’s always been this connection between voting and homeownership, and so it’s not surprising that we have tax incentives. Creating continuity in neighborhoods and in communities is important. But I think that renters do get the short shrift, and it would be nice to see some way to help renters so that they, too, can achieve whatever it is their American dream is, whether it’s homeownership, or generational wealth, or trying to find a way for them to just make it through the year. I think there are a lot of homeowners; there are fewer than there were, and so we could over the years see this shift a little bit more.

One thing that I think is interesting is … I understand supporting your primary home. It’s interesting that we’ve cut back on the support for second homes, but yet we provide tremendous incentives to investors for investment property, and I could imagine that might change over the course of the years.

Benz: Going back to rental properties, you’ve long been an enthusiast about this idea of buying rental properties as investments, and you’ve cautioned it’s not for everyone, but you often talk to investor groups about how to do this, and you’ve been a successful owner of rental properties yourself. So, can you talk about how rising rates complicate the calculus about whether to purchase a rental property?

Glink: In my mind, rental properties are a very long-term investment. It may even be longer term than the house you live in. There are different things that happen over the years where you may need a bigger house or a smaller house or a different community, different school district for your kids. But rental properties, if you buy them, my thinking is you want to buy them for the long run. Airbnb has really changed the calculus, and not just them, but Vrbo and other places where people are buying properties and renting them out. And what we saw during the pandemic is—and this literally almost put Airbnb out of business—people just didn’t go anywhere, and they didn’t rent properties. And so, all those people still had properties they needed to rent and mortgages they needed to pay, and a lot of those people ended up selling properties and got out of the business. And the people who were able to hold on, they’re happy now because, of course, there’s a tremendous amount of people traveling the globe and they want to stay somewhere. But for other people, the idea of a longer-term investment is more attractive.

For us, my husband and I, we’ve had a property that’s a rental property. We’ve had it for almost 25 years. We had another rental property for 10 years. We ended up selling that one to the last tenant, and she just made us an offer we couldn’t refuse, so we got out of it. And I think that that property will end up being something—we’re almost done paying the mortgage on it. We’ve had to make some investments over the years, but we’re now getting so much rental income from it, it will be a very nice addition to our, I think, retirement income. Not that I’m retiring, but if I ever do, it’s a nice addition to have. And I think at the end of the day, that’s why the mom-and-pop investors, the ones who own three to 10 different properties, what are they looking for? If they can make $200 a month from 10 properties, it’s $2,000 a month, $24,000 a year. Some people are able to earn a lot more than that. Maybe it’s $40,000 or $50,000 a year. If you’re not going to get that much from Social Security and you want to augment that income, rental properties are a nice way to do it, and again, that’s a very long-term investment.

Benz: Well, it also strikes me as we’ve all been more attuned to inflation over the past couple of years that there is a feature of that real estate ownership that as a landlord, you’re able to essentially benefit from inflationary periods.

Glink: Yes, I think you can, especially if prices go up. Markets like Chicago and a few others haven’t seen that price appreciation, but plenty of others have. And I’ve got friends who are in Boise and in Scottsdale and in so many other communities where they’ve seen the price of their rental properties double and even triple, and now they’re able to get more in rent, and they’re really not paying very much more in taxes. And so, for them, it’s been a big windfall. They were fine making money, a little bit of money, from their renters early on—now they’re making a lot more. That makes them happy, and of course, they’re finding ways to use that capital.

Benz: Right. It seems like we’d also want to include a caution here about the maintenance aspect of this, especially, when we’re thinking about people approaching retirement. If they are a small landlord, they need to have at least a plan for how they will help maintain these homes, right?

Glink: Oh, there is no question. I’ll just tell you from ourselves, I think after about 22 years of owning the property, we had to completely replace—this is our investment property—we had to replace our air conditioning system. And the bill for that was about $8,000 or maybe $10,000, something like that. And we only get, I think, $2,500 a month rent for the property. And so, I said to Sam, well, this year will not be the profitable year. And he said, no, it won’t. But over the long haul, we’ll have to replace the kitchen at some point in time. We’ve already replaced some appliances here and there, but the cabinets are wearing out and the bathroom is looking a little tired. You just have to put in that work. But once we get that done, we’ll probably be able to charge a little bit more for it. And we’ve had a lot of years where we didn’t really have to do much of anything other than repaint and clean the carpets or what have you. So, I think it’s really a question of understanding what your costs are, imagining what they will be going forward, and then just setting aside some of that income every month so that you’ve got that maintenance pocket ready to go, and it’s sitting there, cash. If you need to pull it, you pull it. And if you don’t, then you’ll be able to use some of it.

Benz: You referenced earlier on in the conversation commercial real estate office space in particular. It seems like there are storm clouds gathering, or at least concern that storm clouds are gathering, in part because of all these vacancies in office space. Can you expand on that?

Glink: Well, I think storm clouds are here. I think it’s pouring in some areas. So, what’s happening? Everybody who moved to Boise—not to pick on Boise, but because they love the lifestyle and they left downtown San Francisco. And now San Francisco has large office buildings that are empty and they’re turning those properties back to the bank. It’s not just San Francisco, though. It’s also happening in Chicago, and in New York, and in London, and in Paris, and in Madrid, and basically all over the world where we’ve had such a focus on big cities and now people are able to work from home. That’s what they want to do. They don’t need to come into the office much again as CEOs might want them to. And so, these office buildings are empty.

And I heard a really interesting discussion at this year’s National Association of Real Estate Editors Conference about how difficult it is to actually convert office buildings into residential properties. And I think it’s worth thinking about this because I see a lot of stories about, oh, we should just take these buildings and we should make them into condos and then we would have enough property for everybody. And some problems with that are, believe it or not, it’s very difficult to take an office tower that has one elevator bank and one set of restrooms per floor and turn that into maybe six, eight, or 10 apartments, each of which has their own bathroom. So, you’ve got to run stacks eight different ways and a tall tower. The way that the floors are portioned may not be able to take the weight that you might want to put in these different things—the structural integrity may have an issue. The windows typically are floor-to-ceiling glass. They don’t open. For residential buildings, you want to have windows that open. Everybody in a residential building today would like to have a balcony or some outdoor space. A lot of times office towers don’t have that. And then, you get into something that’s, I think, becoming a bigger deal, which is what do you do about all the electric cars that are out there and people who need space to charge those up. And in many cases, our office towers aren’t electrified in a way that would allow the substation to pump in enough electricity for all of us to charge our cars at the same time. And so, that’s another issue that’s becoming a big deal for condos, and townhomes, and communities where people have a bigger need for electricity and it’s not self-generating. It needs to come from a substation.

So, when you start to look at that and you add up all the costs of doing all the work that you need to do to these buildings, what becomes clear is that in many cases it’s literally cheaper to tear down a big office building and just build a new condo building. And I think you may start to see more of that happening, but that also has repercussions for a city and certainly for the lenders of those buildings.

Benz: I think that some investors who might be listening to this might think, well, if things get bad enough for this sector, maybe there will be buying opportunities at some point. Is it just such a risky, troubled space that you would say don’t do that or if you do do it, do it through some kind of a broadly diversified mutual fund that spreads you across different property types?

Glink: I think it’s really hard for an average investor to find an office tower and convert it. I think that you’re talking about hundreds of millions of dollars.

Benz: Definitely don’t do that.

Glink: Yeah. And now that unfortunately Sam Zell is no longer with us, somebody else will have to become the vulture of real estate, I guess. But I don’t know. I think that there will be some sort of conversion. I think there’s going to be a whole lot of these properties handed back to lenders. They’re literally not worth what people paid for them to a great degree. Commercial property is valued quite differently than residential. It’s all about what rent you have coming in and not at all about location or how nice the carpet is. So, if you’ve only got a building that’s a quarter filled and you’ve cut back on those rents just to fill that space, that building, which you might have paid $500 million for, might only be worth $125 million. It’s not even worth trying to lease it back up. Just hand the property back to the lender and move on. So, we’ll have to see what happens with those properties—how many there are, and what the lenders decide to do with them. Because then they’re holding these assets and they’ve got to get rid of them, so they get marked down, and that’s going to cause, I think, a bit of a ripple effect.

So, in a couple of years, once we see the full shakeout and whether people are staying at home and working at home for sure and not going back to the office, and if they’re not going to move back to cities, I think we’re going to have to see a profound change in how we imagine cities of the future and what we do with the properties that are there.

Benz: Sticking with commercial real estate, if people want to include it as a component of their portfolios, I’d like your sense of how much of the investment portfolio it should be. So, assume that I want to carve out a stake of REIT exposure, real estate investment trust exposure, in my portfolio, how do I rightsize that position? And also, I’d be curious to get your thoughts on the best way to do it. Am I better off owning a mutual fund rather than trying to pick and choose specific REITs?

Glink: That’s a great question. I’m an index fund girl at heart, index mutual funds. I like them because they’re well-diversified, they’re cheap to own, they’re easy to own. I think you find yourself a REIT that maybe is held or some sort of index mutual fund that invests in real estate. So, REIT is a real estate investment trust. You can get them for mortgages, you can get them for hospitals, you can get them for office towers. I think you look very closely at it, and I think right now there’s quite a bit of downside risk to owning one. So, I would be very, very cautious about when you buy into something like that. But in any case, if you own a home and your home is already 70% of your net worth, I wouldn’t advise putting more than 5% or 8%, maybe 10% of what’s left of your investable assets into a real estate trust. I think people who want to invest in real estate should buy an investment property—a condo you can rent out, a small house, something that’s manageable. I think you’re going to find better results in that, at least in the short run and probably in the long run. But if you wanted to get some of that commercial property exposure, just remember that REITs have to distribute 95%, I think that’s the number, of the money that they make every year, which is good, except that it’s very opaque how those numbers get constructed. And it’s very easy for that money to just, in my view, go missing or get eaten up by costs and expenses. And you as a little small investor in a very large REIT aren’t going to have a whole lot of say. So, proceed with caution.

Benz: And that income is taxed at your ordinary income tax rate too, which is another negative, I think, potentially.

Glink: Yes.

Benz: I’d like to ask kind of a big-picture question, and it’s one that we touched on last time you were on the podcast, which is about the housing shortage. You referenced that potentially these office towers could be repurposed, but it’s going to be a long haul to get them turned into housing. But can you talk about the state of the state there in terms of the lack of affordable housing specifically in many markets? It doesn’t seem like rising rates and the current tight inventory is going to make that any better. Is that right?

Glink: I think that’s true. I’m a little concerned at the pace with which we’re building new housing. One thing that I think people don’t always understand, and maybe I’ve said this before on your show, is that it isn’t just about the increase in population every year. More people live in this country, we need more housing. Twenty-five years ago, it might have been 300 million, now we’re at 350 million or 370 million people. Where are all those people living? But it’s also that housing gets old and needs to be replaced. And so, you have housing that’s outlived its usefulness and is no longer usable for housing. So, you have to replace that as well. Until we really start building in much larger numbers, I don’t understand, and I can’t imagine how this housing shortage is going to go away. And so, I don’t see prices going down anytime soon. You’ve got a very large population bubble with millennials and now Gen Z that are coming into the marketplace, and they’re going to want places to live. And so, we’ve got to build it for them so that they can find it. And eventually, what’s going to happen when interest rates do go down? You’re just going to have a feeding frenzy for the properties that are out there.

So, what could happen is you get, every year in America—and I’m not sure what the number is—8 million, 12 million seniors die, other people die. So, you’ve got a population shift that goes on. But we do need to build more to be able to accommodate all the people who live here and want to move out. And until we do, I think that’s going to be problematic for schools, for the future of our kids, and their own delaying of major life milestones. So, when I started writing about real estate, Christine, the average age of a first-time homebuyer was 26. And today it’s like 34 or 35. The average age when people got married was younger. Now, if you live in a city, it’s like 34. People are delaying. It takes seven years to go through a college. It takes eight or nine years to pay off your car. It’s all been delayed. So, where does that stop? I’m not a population expert, but I would just say to you that people grow up, and in this country, we tell them they should move on and move out of their parents’ house. And they’re like, well, where do I go? And so, that’s the question.

Benz: We’ve had some interesting conversations on this podcast with, I can think of a couple of people, Ramit Sethi, JL Collins, where they both are not entirely dismissive of homeownership, but they feel like we have a cult of owning homes in this country. I’m guessing you disagree. You’re pretty pro real estate. But can you talk about that, whether owning a home is a key ingredient to financial wellness?

Glink: I think, if you just look at the numbers and say that the vast majority, the average American has 60% or 70% of their wealth in their home at retirement, what would happen if they never owned a home? Well, you could say that, well you just live in the same rental property. So, that’s what you live in and instead you invest all the difference. But the quality of rental units is never what it would be if it’s your own and you don’t want to make investments in that because that’s just for the landlord’s benefit, not yours. And so, you lose the ability to, with every payment, basically pay into your little pot of equity. And so, I don’t think that the typical American is able to set aside the difference and invest it and be smart about investing. Now you’re asking them to do 10 or 15 other things. If you buy a house with a 30-year fixed-rate loan, you know what you’re going to be paying every single year for those 30 years. And if you don’t move, then that’s all to the benefit. You’ve locked in those costs. I don’t see that happening with rentals, as we’ve seen over the last couple of years particularly. But I also think that people who rent don’t get the same psychic benefit of being part of that owner’s society. They certainly aren’t building generational wealth to the same degree. And so, while I appreciate the mathematical argument that, well, if you just spend the same amount in your rent and invest the difference, you’ll do better or whatever, you’re asking people to become experts in investing. And I think you and I would both agree that that can be a little bit harder than it seems.

Benz: Well, Ilyce, it’s always so great to talk to you to get your perspective on so many different aspects of this. Thank you so much for taking the time to be here.

Glink: It’s always a pleasure, Christine. Thank you.

Benz: Thank you for joining us on The Long View. If you could, please take a moment to subscribe to and rate the podcast on Apple, Spotify, or wherever you get your podcasts.

You can follow us on Twitter @Christine_Benz.

Ptak: And @Syouth1, which is, S-Y-O-U-T-H and the number 1.

Benz: George Castady is our engineer for the podcast and Kari Greczek produces the show notes each week.

Finally, we’d love to get your feedback. If you have a comment or a guest idea, please email us at TheLongView@Morningstar.com. Until next time, thanks for joining us.

(Disclaimer: This recording is for informational purposes only and should not be considered investment advice. Opinions expressed are as of the date of recording. Such opinions are subject to change. The views and opinions of guests on this program are not necessarily those of Morningstar, Inc. and its affiliates. While this guest may license or offer products and services of Morningstar and its affiliates, unless otherwise stated, he/she is not affiliated with Morningstar and its affiliates. Morningstar does not guarantee the accuracy, or the completeness of the data presented herein. Jeff Ptak is an employee of Morningstar Research Services LLC. Morningstar Research Services is a subsidiary of Morningstar, Inc. and is registered with the U.S. Securities and Exchange Commission. Morningstar Research Services shall not be responsible for any trading decisions, damages or other losses resulting from or related to the information, data analysis, or opinions, or their use. Past performance is not a guarantee of future results. All investments are subject to investment risk, including possible loss of principal. Individuals should seriously consider if an investment is suitable for them by referencing their own financial position, investment objectives and risk profile before making any investment decision.)