Waiting for Rates to Drop? Think Different
Freddie Mac reports in their Primary Mortgage Market Survey that 99% of all locked mortgage rates are below current rates, you can see where rates need to get back below 5% for any refinance activity to materialize. Consumers will have life events that drive new opportunities but they'll work to maintain their prized 2.5% - 4% rates.
Adjustable Rate Mortgages - ARMs are below 5% of total originations, but rising. If the yield curve cooperates and shorter term rates become more attractive, we could see an opportunity to use the Product aspects of liability management to put consumers into ARMs again that provide fixed (lower rates) for the next 3-5 years - enough time to create a refinance cycle back into lower longer term rates.
Traditionally ARMs were 15-35% of originations but the 2009 Federal Reserve interest rate push lead to a long term suppression of long term rates... clear abnormal as seen below. Given the average consumers moves every 6 years, products like the 7 Year ARM were solid planning tools that provided fixed rates at a lower cost.
Overall the is more equity in the house than ever (see recent post here).
New financing is a different story - with many houses paid off and the growth of real estate equity - new financing today fixed for 5% could provide an exciting return as stocks continue to become cheaper and provide higher long-term real returns after inflation.
Our concept - LAG - or Liability Asset Gap is about knowing when to consider the arbitrage of cheap debt versus long term growth. As the stock market gets cheaper, there are more and more REITs and other liquid investments paying 10% or higher dividends. The client might want Safety - of knowing their equity isn't all tied up in their house. Liquidity - knowing that 50% of their house equity is accessible without waiting 45 days to qualify and close a loan when they need it, or Return knowing they are making a much higher return by borrowing out of opportunity, not necessity.
Example: Client with $1,000,000 house borrows $500,000. They buy a REIT that focuses on a huge network of apartment building owners on college campuses - the stock has sold off and is historically cheap (allowing for capital gains) and it pays a 10% dividend to offer current income. Using simple math, the $500,000 loan at 5% costs about $25,000 a year to service while the 10% dividend throws off $50,000 a year of income. The house payment is covered, and after taxes the remaining cash flow can be reinvested or used to increase their lifestyle.
Safety - more diversification
Liquidity - REIT is traded on NYSE
Return - $25,000 in additional annual income