Industry wide we are seeing some real panic with originators about rising interest rates. Many of these originators haven’t ever been through a rising rate market and I dare say, never dealt with double digit rates for sure. The reality is nothing functions in a bubble. Everything is connected in one way or another. As professionals, you have to be prepared for the conversation with your clients andyour referral partners to have an understanding of what and the possible whythe rising rates are notas big an issue as one would believe them to be.
First, I think it’s important to have perspective. Mortgage rates over the last forty years have ranged between a high in October 1981 of about 18.5% for a 30-year fixed, and a low in November of 2012 of about 3.25%, the real average has been slightly above 8%. While everyone likes lower rates, higher rates aren’t all that high given the history, and looking at other factors, we can actually make the case that these higher rates are a sign of better things to come!
While customers may complain that their payments are now more than they were when they first started looking, we have a really good grip on whythey are climbing.
- The FED has now completed its plan of reducing MBS purchases.
- The stronger economy doesn’t require lower rates to spur activity.
- A rising stock market pushes rates higher to compete.
So, we can explain the “why”, but we need to explain howthe higher payments pale in comparison of the better economic climate. You do this by showing the rise in payments against:
- Personal income up almost 3% year to date.
- The net income gains due to the new tax plan.
- Rents in most parts of the country are rising faster than the cost of the monthly payments.
People don’t live in a bubble. Unless they choose otherwise, they are going to either rent something or own something. Only you can take the national numbers and bring them down to the local level!
So, take your average transactional value property and put it through the math.
- How much has the cost of that home gone up this year?
- How much would that higher payment be per month?
- If they are selling a home or renting, what is the payment differential?
- What is the net monthly cost of the higher rate?
- How much has the rent gone up year over year?
- How much higher is their net take home pay each month?
- Does the math change their perspective?
If you also ask the question, do you think rates are going higher or lower in the months and years to come? What about property prices? Most experts expect rates to continue higher into 2019 and property to continue to appreciate about 5% annually. What would that same house look like with higher mortgage rates and 5% appreciation? What would the cost of waiting be? Is it worth the gamble?
Nobody lives in a bubble. In one way or another, everything is connected. Higher costs are a fact of life in some areas. Did you see the new phone that costs $1,600!!!
So, calm down and get your facts in order. Get the real local numbers and be prepared to share the information that impacts your market and your borrowers. Also remember to keep your pre-approved clients informed. Don’t call them every day in a panic, but during your weekly follow-up call, be sure to advise them how much rates have moved and how that changes their payments or purchasing power.
Questions or comments: Mike@IMTcoaching.com