Advisors Help Clients Navigate the Frozen Housing Market

High interest rates and low inventory are causing problems for clients, but advisors note that, historically speaking, mortgages are not all that pricey.

By Ed Prince

Kyle Newell’s clients had a dilemma. The Florida couple was retiring and had their hearts set on buying a mountain vacation home in Asheville, N.C. But like many would-be homebuyers today, they were deterred by current high mortgage rates, says Newell, a financial planner who operates Newell Wealth Management in Winter Garden, Fla.

The couple considered continuing to rely on rentals for their getaways, but Newell worked with them to determine the best option.

“We did run the numbers on using rentals versus owning outright,” Newell says in an email. “These clients planned to go for weeks to months at a time. We calculated the annual sunk cost of owning a condo to be around $10,000 per year (utilities, internet, property taxes, insurances and HOA). On top of this would be ongoing maintenance and other one-offs, which we estimated about $5k/year. This would be around 50 nights in a rental, which is about what they expect to use, but they may go for longer if they have their own place.”

The couple had cash but was outbid five or six times. After two months, they landed a deal in their price range and got their dream home.

“They did like the upside potential of owning the condo, but they plan on keeping it until their passing, so they did not see equity as any substantial benefit or risk to them,” Newell says. “Ultimately, the decision ended up being more about the ability to come and go as they please and have a place of their own.”

While this couple pushed past the added cost of higher mortgage rates, Newell and other financial advisors say many clients feel trapped by the current frozen housing market.

Higher rates, higher prices

Many homeowners are holding off on selling because they don’t want to trade in their rock-bottom mortgage rate for a new home with a much higher rate. The resulting contraction in inventory has kept prices high and still increasing in many areas of the country.

Goldman Sachs Research expects 30-year U.S. mortgage rates to stay above 7% in 2024. It also notes, citing Case-Shiller data, that U.S. home prices appreciated in August at an 11% annualized pace. In addition, the Goldman Sachs Housing Affordability Index touched a record low in late 2023 and is expected to improve only gradually over the next three years.

Advisor feels clients’ pain

Monica Dwyer, CFP, a wealth advisor with Harvest Financial in Cincinnati, Ohio, says that not only does she have clients who have been stymied by the frozen housing market, she is in the same boat.

“I have a 2.125% APR on my home,” Dwyer says. “Me and my husband, we’re in our mid-50s. Probably in the next 10 years, I would love to be in a house that didn’t have steps.” With four children and an in-law currently at home, the house is a good fit, she says. “But when all these people start moving out, when the kids start becoming independent, it’s probably not going to be the best, the most ideal house for us. But I’m definitely feeling like I’m stuck.”

“Clients feel stuck for sure,” agrees Newell. “Some have contemplated moving to cash in on their new-found equity, but higher interest rates and low inventory keep them nervous to make a change.”

Dwyer, who specializes in financial planning related to divorce, says the current conditions adversely affect even those who do not plan on moving. In the case of a divorcing couple who both have their names on a mortgage, taking out a new mortgage at a much higher rate may be required because of the change in ownership. “So that can force people into a situation where something that was affordable is no longer affordable based on the new interest rates,” Dwyer says.

She cites a client whose plans were derailed by the frozen market, a woman who wanted to downsize once her son graduated from high school. The client told her, “For me to downsize, I would pay more money than I would just staying here because I have such a low interest rate,” says Dwyer. “So, she’s making improvements to the house now because it doesn’t make sense for her to buy something smaller, because it would cost her more.”

Interest anticipation: a risky game

Dwyer reports that some clients are putting off buying a new home, instead waiting for interest rates to go down. “That’s somewhat of a risk,” she says. “Because the problem is that — if you would have asked me when the interest rate hikes started, I would have thought that they would have stopped by now — so interest rates are really, really hard to predict.”

Newell concurs. “Right now, I don’t have anyone considering downsizing their home-buying plans but rather just waiting interest rates out. We discussed there is risk to this strategy because it is not guaranteed prices or interest rate will drop.” But that’s not a big problem for them, Newell says. “The clients I’m working with don’t ‘have’ to move, so they are fine continuing to wait and potentially not move if the environment doesn’t change substantially.”

“The housing market feels like a game of chicken,” writes Rob Schultz, CFP, a wealth manager with NWF Advisory in Los Angeles. “Sellers are not wanting to give up their 3% mortgages, and buyers are hesitant about paying a rate twice what was available last year. Those that are still renting are able to put aside money in high-yield savings accounts so when they eventually buy, it will be a smaller mortgage to take out,” Schultz says.

“I don’t see it affecting retirement plans significantly as those entering retirement typically have paid off their mortgage so they’re not concerned about losing a low-rate loan,” he says.

Are rates really that high?

But Dwyer, Newell and other advisors offer a caveat about the current “high” mortgage rates.

“I generally talk them through historical rates to remind them the sub-3% 30-year mortgage was a rarity and may likely never return,” Newell says, adding that he encourages clients to buy if they can afford a house in the current market and then refinance later if rates change.

Anna Sergunina, president and CEO of MainStreet Financial Planning in Los Gatos, Calif., has older clients who bought their first homes in the 1980s when mortgage rates were in double digits.  “They talked about it during our meetings in the context of how it was harder to get started, and how high the monthly payment was, but over time things changed and they could refinance to a lower rate. Many of them are now reaping the benefits, by having homes that are now paid off,” Sergunina says in an email.

“The steps my clients took back then are very well applied today. It all comes down to personal financial goals,” Sergunina writes. “… If a home purchase is not a feasible option right now, then we will work on figuring out when it might be.”

“I fully recognize that 8% is an average historical rate,” says Dwyer. “So, if my daughter, or one of my other kids came to me and said, ‘I have enough money for a down payment on a house. Should I buy one?’ I would say yes, because the risk to them is that interest rates could go higher, but if they go lower, they can always re-mortgage at a lower rate.”

“Here’s the crazy thing,” Dwyer cautions. “Everyone is thinking right now, interest rates are going to go down, probably in the short term, like the next few years. They will. But I think it would be a huge mistake for people to think this is the highest interest rates will go, because we know that historically that hasn’t been the case.”

Dwyer says many potential homebuyers, including herself, have experienced sticker shock over mortgage rates. “But the question is, should we really have sticker shock? And the answer is, probably no.”

She says she and her husband considered moving a year or two ago, but she “panicked,” at mortgage rates, which were lower than now. “I said to my husband, ‘Let’s not do it, because it is a half a million dollars. We’re gonna pay a half a million dollars to move. I couldn’t wrap my money brain around it. Well, maybe that was a mistake.”

“I don’t particularly like my house, but I feel pretty stymied,” Dwyer says. “I feel like I have the golden handcuffs on. Yeah, that 2.125 is pretty beautiful; I don’t want to give that up.”

In a four-decade career in journalism, Ed Prince has served as an editor with many of New Jersey’s leading newspapers, including the Star-Ledger, Asbury Park Press and Home News Tribune.

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