House prices and interest rates are a source of stress, but this can be allayed with a few home truths
As interest rates climb and housing prices fall, clients may be concerned about their housing investment, but advisors can help them put it into perspective.
“If clients are looking at their housing as an investment, they haven’t lost until they sell,” Francine Dick, a financial planner with Carte Wealth Management Inc., told Wealth Professional.
So, if clients bought a property at a high price during the recent boom and now are seeing its value eroding, she said she reminds clients that “if you bought the house to live in, then just stay put if you can do that.
“The other thing to remember is that, if they bought the house and are living in it, they have to pay a mortgage regardless, so they’re building equity in the house, regardless of what the price is. As their mortgage goes down, their asset goes up. So, that’s something to keep in mind.”
Clients who must move, however, may need to be more flexible. That could apply whether they’re retirees wanting to get their assets out of their homes to move to the next phase of their lives or employees who left their work town during the pandemic and must now return to the office.
“Clients should stay put if they can and see how things unfold,” said Dick. “But, if they can’t, they have to be flexible.”
If they must return to a workplace a couple of times a week, she said they could take a bus or commuter train into the city. If clients must sell to return to work, they may have to lower their expectations for what price they can get for their homes. They may also not be able to buy what they expected at the other end.
“We all talk about prices and investing and the value of houses, but we need to remind clients that the primary purpose of housing is to provide a home. Many have forgotten that. People will always need a house,” she said.
If their retirement dream has been to sell and move, they may also need to be flexible – unless they’ve already bought another place. This would a good time to meet with them and review their plans as they may need to adjust to living on less or perhaps finding part-time work.
“We, as financial advisors, can work with them to tweak the numbers in their financial plan and show them how things will now look,” said Dick. “It might not be that bad. I’d be more concerned about their top-10 investments rather than their housing right now. So, I think the key for clients is to be flexible, to be open to things, and to manage their expectations.”
Dick also noted that advisors can encourage clients who want to get into the housing market to be creative as more people are looking at co-owning property. Some are siblings. Others may be single moms banding together to buy a home. But, she urged advisors to ensure that their clients get a legal agreement, which states who owns what percentage of a property, how the co-owners, share the maintenance costs, and what happens if one person wants to sell.
“It’s a good way to get into the market,” said Dick. “But they need a good legal agreement.”
The other thing advisors can help clients consider is their mortgage renewal. If it’s due in the next couple of years, they could calculate what they would then owe and readjust their budget to begin to save that amount now, then save that money to pay down some of principal when they renew.
“They’d have a little chunk of money, so they could pay down some of the principle,” she said. “That’s just being prepared because I don’t think interest rates are going to get back down to where they were.”
Dick said some of her clients are in today’s market to buy, while others are interested in locking in a fixed-rate mortgage rather than maintaining a variable rate-mortgage. But, housing isn’t as much of a concern for them as it appears to be in the media these days.
“So, if they bought their home to live in, they can relax,” said Dick. “I’ve lived in my home for 35 years and I’ve seen the price drop at least twice, maybe three times. But, over the years, just like any investment, it’s been fine.
“We’ve seen a housing correction, which has happened before. This one may be a little more severe, but I don’t think there’s a crash coming. In fact, I think prices will start to go up, but not like they did in 2021 and the early part of 2022. They’re not going to rise that fast.”