With The Fed Poised To Raise Rates Again, Pushing Mortgage Rates Higher, Advisors’ Clients May Need Other Financial Solutions For Housing
The Federal Reserve continues to raise interest rates to dampen inflation. And while there has been some positive response, clearly, these increases have not done enough. All signs point to another rate increase at the Fed’s meeting this month, on the heels of a 0.75 percentage point increase in November.
Inflation and interest rate increases present a double-edged sword for the housing market. Simultaneously, the cost of everyday essentials has skyrocketed, taking a significant bite out of Americans’ savings, and mortgage rates are nearing generational heights with the average 30-year-fixed rate mortgage now well above 7%.
That puts first-time homebuyers pursuing the American Dream in a tough spot.
Has the Fed killed the American Dream? It isn’t that simple.
Shrinking Purchasing Power
It is not just higher interest rates keeping first-time homebuyers on the sidelines, but the increased cost of housing.
For example, in 2002, the average price of a single-family home was $226,700. Twenty years later, due to historically low-interest rates, a lack of supply and buyers’ seemingly insatiable appetite, the average price for a similar house was $428,000.
These increases represent an 88% jump from 2002, and equally as impressive, a 30% increase from the prior year price of $329,000.
Additionally, with 30-year mortgages hitting 20-year highs, purchasing power is diminishing even faster. A monthly mortgage on a $300,000 home with 20% down at 3.5% represents a $1,078 monthly payment plus taxes and insurance. Using today’s average rates, a monthly payment on that exact home will set homeowners back $1,517 per month plus taxes and insurance, or over 30% more.
Sidelined Sellers And Lenders
Buyers are facing sticker shock at the open house and bank, leaving homeowners hoping to cash out on home equity searching for different ways to capitalize on the increased value of their homes.
Industry experts estimate that $9.9 trillion of home equity is unutilized in the United States. Finding ways to put this money to active use will stimulate the economy and address the lack of capital in the system due to increased interest rates. But without alternatives to traditional home loans and mortgages, all that home equity goes untapped.
For homebuyers, the choices are stark: Hope for deep discounts and seller concessions or pay more and hope to refinance when interest rates decline. Frankly, neither option is enticing.
However, for cash-strapped homeowners, there are options to leverage home equity outside of the costly mortgage industry. Home equity agreements (HEAs) enable homeowners to share a small slice of the upside and downside of their property with an institutional investor for cash today. They can use these funds any way they like – pay medical expenses, pay down other debts, start a business, invest in a new property, or just pay for essentials like gas and groceries.
HEAs are not loans. Homeowners make no monthly payments, and when rates fall in the future, they can refinance their first mortgage, using the proceeds to buy back the equity stake sold through an HEA during this period of high-interest rates.
During this period of financial complexity and uncertainty, potential homebuyers and current owners must be more creative to achieve their goals than in the past. And while the Fed can raise interest rates to slow inflation, it cannot kill the American Dream.
Ashley Bete is CIO, CEO and Founder of Leap Analytics Inc., a fintech firm aimed at closing the wealth gap by empowering underserved communities.