Fed tightening puts mortgage planning back on the table
As mortgage rates hit a two-year high, financial advisers are weighing the pros and cons of whether clients should refinance or downsize.
As the Federal Reserve kicks off its first cycle of interest-rate hikes since 2018, mortgage rates are already starting to head higher, which has financial advisers scrambling to help clients navigate their housing and real estate investment exposure.
“I pounded the table and strongly advised every client to lock in, refi and term out their debt in 2020, once the pandemic began and throughout the year,” said Paul Schatz, president of Heritage Capital.
“My view is that now is way too late to refinance,” Schatz added. “Fixed-rate mortgages have basically doubled and that’s like chasing a stock higher and higher.”
According to Bankrate.com, the national average rate for a 30-year fixed mortgage is 4.46%, which compares to 3.73% at the end of January, and 2.68% at the end of December.
The average rate for a 15-year fixed mortgage is 3.72%, compared to 3.05% at the end of January, and 2.49% at the end of December.
While lower mortgage rates have contributed to rising home prices over the past few years, the trend toward higher rates is now colliding with inflated home prices to create new headaches for advisers.
According to the S&P CoreLogic Case-Shiller U.S. National Home Price Index, home prices rose by an average of more than 10% annually over the past three years, including an 18.8% increase in 2021.
“Prices are up and rates are high; that’s not a great recipe for success,” Schatz said. “Real estate prices should not continue higher for much longer. Prices are sky-high and financing costs are much higher than most budgeted. That should put a lid on the market sooner rather than later.”
Chris Chen, founder of Insight Financial Strategists, is in the camp that one can still refinance into a rising rate cycle.
“Chances are that interest rates are going to continue to increase, so today’s rates may look high compared to yesterday’s, but there is a good chance that today’s rates will look low tomorrow,” he said.
In terms of selling high and then renting until housing prices come back down, Chen said that strategy comes with its own set of risks.
“We do need a place to live, and if we have a home already, I don’t think it makes sense to sell the home for a short-term arbitrage between mortgage payments and rent,” he said. “After all the costs are included, it is likely to be an unprofitable trade. Not to mention that many times mortgage payments can actually be lower than rent.”
Dennis Nolte, president of Seacoast Investment Services, drew parallels between the current housing market and the period leading up to the 2008 financial crisis.
“It seems a lot like 2005, which is one of the times we told folks to either sell or not buy residences,” he said. “But now rates are rising, inventory is low, and lending standards are still tight.”
Like Chen, Nolte isn’t a fan of “playing the housing market.”
“Trying to time the sale and sit it out for a couple of years, we’re finding folks aren’t that patient,” he said. “If the current mortgage payment is tolerable and folks can sit with it, we’re advocating to hold primary residences for now. It’s too difficult to find comparable homes unless someone is wanting to downsize significantly.”
If a client is in downsizing mode, and the wheels are already in motion, then “we would be accelerating that,” said Scott Birmingham, lead financial planner at AMR Asset Management Resources.
“The option of selling and renting is an attractive scenario, but in my location [Franklin, Tennessee], the rental prices have increased so dramatically, it may not make sense,” Birmingham said. “Is it too late to refinance? I don’t think so. Rates are still very attractive, just not the 2% and 3% rates we have been spoiled with recently.”
Learn more about reprints and licensing for this article.
