Helping Clients Navigate Higher Rate Environments

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Rising inflation and the Federal Reserve reeling back support have led to quickly rising interest rates. Here’s how you can help clients navigate this new environment.

What’s happening in the market?

There are three main factors affecting the current market: higher mortgage rates, low inventory and higher prices. Let’s explore these challenges.

Higher mortgage rates — According to Freddie Mac, the average 30-year fixed mortgage rate is up more than 2% since the year’s start. This rise is expected to continue as the Federal Reserve has pushed the federal funds rate up by 0.75% since March and began selling its portfolio of mortgage-backed securities.

As the Fed backs away from the market and investors may start demanding higher yields to buy mortgage bonds, buyers must adjust.

Low inventory — Sellers hold the cards right now. As of April 2022, existing home inventory has fallen 10.4% since last year. At the current sales pace, all existing homes in the market are expected to sell within 2.3 months, much faster than a balanced market’s typically anticipated six months.

Rising prices — Rising rates are typically followed by falling prices, or at least a leveling off. But with such an imbalance of supply and demand, 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 is also reflected in the S&P Case-Shiller index, which looks at home prices across 20 cities in a rolling 3-month average. Pre-seasonal adjustment, prices have risen 20.2% since last April.

What should you tell buyers?

There are five big themes you can touch on with clients to help them understand that, with proper planning, today’s market difficulties aren’t insurmountable.

Get preapproved — Getting preapproved is in both your and your buyer’s interests. It helps clients know how much they can afford and lessens the chance that an offer will fall through.

Lock their rate — With rates rising, encourage your clients to lock their rate as soon as possible to avoid paying more.

Consider an ARM — Adjustable-rate mortgages (ARMs) offer lower initial rates over their fixed period than many other loan options and may even be able to increase your client’s preapproval amount.

To mitigate the risk of rising rates, have your client budget carefully and advise them to put extra money toward their mortgage balance. This means lower payments when rates adjust.

Budget mindfully — Remind clients the difference between what they can afford and what they can afford comfortably. Have your client consider their lifestyle and future goals to avoid sacrificing retirement or emergency savings funds.

Preach patience — What goes up must come down. If your client is struggling to find the right house at the right price for them, there’s no shame in waiting until there’s more inventory or more clarity on how prices are impacted by higher rates.

What about sellers?

Selling may be easier than buying right now, but there are still some things for sellers to consider.

Is it the right time to sell? — Your clients may never get more return on investment back for their home than right now. Just be sure to warn clients who need to find a new home that the homebuying process is difficult right now.

Competitive market analysis — A competitive market analysis (CMA) can be imperative for staying on top of the market and better advising clients amidst a rapidly changing environment.

Pay attention to time on market — Be aware just how long your listings are on the market and don’t shy away from appropriately adjusting your pricing strategy.