Consumers historically have not made decisions in the same way investors do when it comes to mortgages, but that is changing, according to a report from a wealth management firm last week.
Leon C. LaBrecque, managing partner and founder of wealth management firm LJPR LLC, has found his working affluent-dominated client base has been increasingly considering a simple, inflation-adjusted “real rate of return” in their mortgage decisions.
Borrowers, he told me “are starting to look at the fact that they are not buying a declining asset any more.”
When asked what the catalyst for the shift in thinking might be, he said, “I think it was a twofold thing: the borrowing rate going down dramatically and then finally the real estate values hitting rock bottom.”
So examples cited in the report: “Go to 2009. House prices were plunging, dropping 16.7%...You could borrow money (if you could get it) at 5.1%, but you bought a declining asset. 5.1% - (-16.7%) = 21.8%. Your real mortgage rate was 21.8%! No wonder houses weren’t moving.
“Now look at today…the rates are low (due to the Fed and the central banks) and the property is appreciating. Rates are now as low as 3.6%. So doing the math, 3.6% - 8.1% = -4.5%. Your real mortgage rate is negative 4.5% (so in effect you’re making money).”
As a result, LaBrecque said, “I think you’re going to see a pretty good size real estate boom happening, I think this is the start...[not]anywhere near the end.”
While mortgages are making more sense as an investment at the consumer level right now, LaBrecque said he does not currently invest in them.
“What’s good for the consumer isn’t necessarily great for the investor,” he said. “From my standpoint, right now it’s great to be a borrower, not necessarily to be a lender.”
LaBrecque said he is staying out of the sector due to
“We think there’s long-term tail risk in that…from an interest rate standpoint,” he said. “We’re sticking to short-term corporates and our fixed side is basically pretty bland…a little emerging market debt, a little high yield. There is nothing on the mortgage side at all because we don’t see reward there. We don’t want to compete with the Fed.”
LaBrecque added that from his company’s perspective, “one sector that shows some opportunity coming out of this is the homebuilding sector,” given that inventories and rates are low and homebuying interest is increasing.
When asked about investment prospects for individual loans and properties in terms of other investors in the broader market, he said, “You would have to get into some credit risk if you wanted to do it.”
LaBrecque added, “I am not sure you would really want to do that…at this juncture…as the real estate market starts picking up…the level of credit risks is starting to change.
“As appraisals go up…it clearly changes the perspective” in terms of how much of a discount is available, he said.
