April 21, 2023

It’s been just over a year since Mortgage rates spiked up significantly, from all-time lows of around 3% to where they currently are in the high 6%’s (average rates always assumes 30 year fixed rate mortgage, excellent credit).  As you can imagine, this has been a damper on demand since many people cannot afford to buy now at these rates and prices.  

The market pumpers, including most real estate agents, homebuilders, even the media, are attempting to assuage would-be homebuyer fears by sticking to the narrative that high home prices are here to stay, and that this is the new norm.  They’ve even come up with a catchy marketing slogan”

Marry the House, Date the Rate

This is a catchy and well-targeted marketing campaign.  I’ve heard several national builders using this phrase in their email solicitations and even in their MLS descriptions.  I’ve even seen cringe-worthy instagram videos from real estate agents (you know the types!) spouting this same garbage.  

A large portion of the homebuyer market is younger buyers, millennial and generation z.  Let’s say aged 25-40.  This is a very large demographic by size/population, and aligns with the age that many people do in fact get married (average age of marriage in 2022 was 30 for females and 32 for males) and buy their first house is 36.  Many are recently married, or will be marrying soon, obviously a major life milestone.  To correlate buying a house to getting married is smart if you are in the business of selling houses.  To imply that you are behind in life or need to buy a house as a prerequisite to being an adult is also a savvy marketing move.  This plays on some people’s emotions. 

People may feel persuaded to purchase now, at high prices, and despite the high cost of buying when considering the financing costs.  

They may even feel it’s ok to extend themselves financially or otherwise spend more than they are comfortable since they’ll be able to refinance later, right?  

Date the Rate

It is absolutely not guaranteed to be able to refinance later, and anyone who speaks this way without discussing the risks is being dishonest.  

As you can see by this chart, and when you look at the history of monetary policy, there are eras or long term trends that occur.

From 1970, the farthest back these records go, you can see that the 1970s and early 1980s, an era marked by high inflation, the mortgage rates continued up for many years, over a decade in fact.  And, it took until the 2000s for the rates to reside under 7% consistently.  

If we are entering an era of sustained high inflation, the federal reserve may be forced to keep rates high for a long period of time, and we may be in the early innings of a long term rate hiking cycle.  

If this is the case, and there is certainly historical precedent for this, then there would be no opportunity for someone who “dates the rate” to ever break up with their rate.  Worse for those people, as rates rise, prices will continue to fall.  

Nominal prices and cost of borrowing (i.e. mortgage rates) are inversely correlated.  This is a fundamental and mathematically proven law.  

Thus, if you are banking on the ability to refinance, you are gambling on the certainty that the Federal Reserve will “pivot” and will lower interest rates.  

What would it take for the Fed to pivot?  

There are some who argue that for the Fed to pivot and lower their Fed Funds Rate back to very low levels, we would need to have a very bad recession.  Typically in a very bad recession, certainly you can count on home prices plummeting, but you can also count on highly elevated levels of unemployment.  

It’s a Catch 22.  

Should the rates return to levels we saw up until March 2022, it’s likely that the economic conditions will be very bad.  This means that if you go to refinance, your house that you bought for $650,000 may now only be appraised for $450,000.  This makes it much harder to refinance from a loan to value standpoint, where you may have to bring a large amount of money to the table just to close a refi, and that doesn’t even take into account your income situation, if it’s the same.  You cannot refinance if you are no longer employed, or maybe switched jobs to a lower paying job.  Likewise, refinancing costs money out of pocket.  

Conclusion

We are in the midst of a shift, a paradigm change right now.  If you can afford the house you are trying to buy, at today’s rates, comfortably and you have some cushion, some reserves, then you will be ok even if the rates never go down again and you are never able to refinance.  

If you are buying a property and are banking on either selling your property in the short term, or banking on refinancing because the payments you have at closing are so onerous, then you are really playing with fire.   

Either way, dating the rate may turn into a long term marriage.  These rates may be stage 4 clingers.