Helping Clients Navigate Higher Rate Environments
8 minute-readMay 22, 2022
If you’ve gotten into real estate at any point in the last 15 years or so, there have only been the briefest periods of rising mortgage rates, if you remember them at all. With elevated levels of inflation and the Fed pulling back on support, rates have begun to rise quickly. How can you help your clients navigate in this new era?
What’s Happening In The Market?
The housing market is being defined by three things right now: higher mortgage rates, low inventory and higher prices. Let’s run through the challenges the industry is confronting.
Higher Mortgage Rates
Freddie Mac puts out a weekly survey tracking conventional mortgage rates. While rates dipped a little bit in the final report prior to this writing, the average rate for a 30-year fixed mortgage is still up more than 2% since the beginning of the year at 5.25%.
That rate survey also comes with a big caveat: It’s assumed someone looking to buy or refinance has a 20% down payment or equity amount. If you’re working with first-time home buyers regularly, you know that the down payment can often be from 3% – 5%. All else equal, that means a higher rate than the survey.
You should also prepare your clients for the idea that rates will very likely rise even further in the coming months. The Federal Reserve has pushed up the federal funds rate by 0.75% since March. Mortgage rates aren’t directly impacted, but they tend to go in the same direction.
Moreover, beginning in June, the Federal Reserve will begin selling its portfolio of mortgage-backed securities. The Fed initially began buying them because housing makes up a significant portion of the economy. Low rates encouraged buying homes.
As the Fed begins to back away from the market, other investors are likely to demand higher yields to buy mortgage bonds. Assuming things play out as expected, this will lead to higher rates. This is just something buyers will have to deal with until the new normal is reached in a post-Fed intervention world.
If your buyers can deal with higher financing costs, will they be able to find a suitable home? This remains a big question mark. The inventory of available homes on the market is still horrendously low when it comes to existing homes. People tend to look to existing homes first because they’re cheaper than new construction.
Existing home inventory improved 10.8% in April at 1.03 million units, but this is still falling 10.4% from a year ago. At the current sales pace, every existing home in market would be sold within 2.3 months. For context, a market is considered in balance when there’s 6 months’ worth of supply. Sellers hold the cards right now.
Supply in the market for new homes is much healthier at 6.4 months relative to the pace of sales. Even so, the median price of a new home was $45,500 higher than that of an existing home.
Ordinarily, rising rates are shortly followed by falling prices, or at least a leveling off. However, that may not happen as quickly as normal given that the lack of inventory is creating an imbalance of supply and demand. Although home sales have taken a step back for both new and existing homes in recent months, prices continue to rise. The median price of an existing home is up 14.8% since last April, while the median new home price is up 21.4% since last March.
This effect is also seen when looking at the S&P Case-Shiller index. The most popular version of this looks at home prices in transactions across 20 cities in a rolling 3-month average. Before accounting for seasonal adjustment, prices have risen 20.2% since last April.
What Should You Tell Buyers?
The trifecta of high mortgage rates, low inventory and rising prices mean that this market presents its fair share of difficulties. However, there are five big themes you can touch on to help your clients understand that with proper planning, these challenges are far from insurmountable.
Preapproval is important in any market because it’s in both your and your buyer’s interests to know exactly how much they can afford to spend. Of course, sellers want to see that preapproval as well because it lessens the chance that the offer will fall through at the last second.
Rocket Mortgage® offers a Verified Approval.1 In this process, we pull a client’s credit and request documentation from them regarding the income and assets they’ll be using to qualify. Within 24 hours of the receipt of all documentation, a client will receive a preapproval showing how much they can afford.
We want your clients to be able to confidently make their offer. If they qualify for a Verified Approval and don’t close due to an error on our part, Rocket Mortgage will give your client $1,000.
Lock Their Rate
With rates generally going up, one of the best things you can do is encourage your clients to lock their rate as soon as possible. Traditionally, this has been something clients can only do once they find a property and submit a signed purchase agreement. RateShield® turns that on its head.2
RateShield is a Verified Approval that allows clients to lock their interest rate for up to 90 days while they look for a home. Better yet, it includes a one-time float down option that allows them to take a lower rate if they fall over that timeframe. If rates continue to rise, the client gets to keep their locked rate throughout that 90-day period.
Consider An ARM
Adjustable-rate mortgages (ARMs) offer a lower initial rate over their fixed period than many other loan options. Because adjustment is built into the concept of the loan, in considering return, investors aren’t as worried about forecasting inflation 30 years out, enabling a lower fixed rate at the beginning of the term.
This isn’t without risk that rates may rise in the future, but a client can look at one thing to mitigate this. With careful budgeting, a client in the right financial situation may be able to put extra money toward their mortgage balance. This way, their payment can be lower when the rate adjusts than it would be if your client had only paid the amount due.
Another consideration is how long your client plans to be in the house. You may find that they expect to move out before the ARM would ever adjust. Of course, plans can change, but it’s something worth thinking about as clients mull over loan options.
Finally, because a lower rate equals a lower initial monthly payment, it could increase your client’s preapproval amount. This could be key in expanding their buying power in a competitive market.
A preapproval backed by documentation as a Verified Approval should reliably give your clients the top end of what they can spend, especially if they’ve locked their rate. Still, with rapidly rising prices, it’s important to emphasize there’s a difference between what buyers can afford and what they can afford comfortably.
When there’s a high level of competition, it can be easy to get sucked into a bidding war and spend more than you would’ve initially wished to secure a home. Advise your clients to consider their lifestyle and future goals. Getting the house they want is great, but are they doing so at the expense of emergency savings, retirement funds and the occasional vacation?
If clients are having a hard time finding a home that meets their requirements in their price range right now, maybe the timing just isn’t right. No one knows for sure when, but rising rates are likely to take some of the pressure out of the housing market eventually, prices may or may not fall, but they certainly can’t keep rising at this breakneck pace.
If things get too difficult right now, there’s no shame in waiting 6 months or a year. There may be more inventory on the market, and there’s a decent chance that by then we’ll have a better idea of how prices are impacted by higher rates.
If the right opportunity comes along before then, they can still jump on it. It’s just important to make sure they’re not too discouraged and to help them manage expectations during this process.
What About Sellers?
The selling side of this equation is somewhat easier because they’re getting paid for their home. Still, there are a few important considerations.
Is It The Right Time To Sell?
There’s a fairly compelling argument to be made right now that with home prices being what they are, your clients could very well be selling at the top of the market. If that’s the case, they may never get more return on investment back for their home then they would right now. However, there’s a flip side.
If they’re selling in this market, most of these people would then be looking for another home in this market as well. They would be paying more for the home at a higher interest rate than they likely have on their current mortgage if they’ve refinanced at any time within the last few years. There are still reasons to sell, but they may think harder.
Competitive Market Analysis
Real estate agents do this stuff all the time, but it’s worth talking about the special importance of a competitive market analysis in a changing environment.
Knowing what recent comparables have sold for and staying on top of the market will give you an inkling of the way the market is shifting. You’ll be better able to advise your clients.
Pay Attention To Time On Market
Another good indication that you’re pricing competitively or otherwise is time on market in your area. If you find that a home you’re listing has been available without an accepted offer for appreciably longer than others, it could be time to rethink your pricing strategy in light of increasing financing costs.
The Bottom Line
Limited inventory to go along with rising mortgage rates and seemingly ever higher home prices is enough to test even the most unflappable home buyer. This is the time that having a good real estate agent who can combat a stressful situation with a plan of action is extremely valuable.
By arming your clients with a strong preapproval that can also protect them against interest rate fluctuations, you’ve got the start of a winning formula. If they don’t plan to be in their house long, an ARM could offer considerable savings. Finally, patience is key. If now isn’t the right time, things might be better if they wait a while.
On the seller’s side, the first thing you need to ask a potential client is whether they think they can get another home with financing terms they like even if they are selling at the top of the market. After that, it’s all about competitive market analysis and paying attention to the time on market of the property.
Your counsel can be an incredible asset in an uncertain time. Now you have a game plan. Go help some clients!
1 Your client’s participation in the Verified Approval program is based on an underwriter’s comprehensive analysis of their credit, income, employment status, debt, property, insurance and appraisal as well as a satisfactory title report/search. If new information materially changes the underwriting decision resulting in a denial of the credit request, if the loan fails to close for a reason outside of Rocket Mortgage’s control, or if the client no longer wants to proceed with the loan, their participation in the program will be discontinued. If the client’s eligibility in the program does not change and their mortgage loan does not close, they will receive $1,000. This offer does not apply to new purchase loans submitted to Rocket Mortgage through a mortgage broker. This offer is not valid for self-employed clients. Rocket Mortgage reserves the right to cancel this offer at any time. Acceptance of this offer constitutes the acceptance of these terms and conditions, which are subject to change at the sole discretion of Rocket Mortgage. This is not a commitment to lend. Additional conditions or exclusions may apply.
2 RateShield Approval is a Verified Approval with an interest rate lock for up to 90 days. If rates increase, your rate will stay the same for 90 days. If rates decrease, you will be able to lower your rate one time within 90 days. Please contact your Home Loan Expert for additional information. This offer is only valid on certain 30-year purchase loans. Additional conditions and exclusions may apply.
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