Advisors rework home-equity plans as 30-year mortgage rate tops 7%

The average 30-year fixed mortgage rate ran to 7.03% in the week ended Sept. 24, the first reading above 7% in 20 months and 73 basis points above the same week a year earlier, according to Freddie Mac's Primary Mortgage Market Survey. Behind that print sat a selloff at the long end of the Treasury curve: the market yield on the 30-year bond touched roughly 5.5%, a level not seen since June 2004, and the 10-year note, which mortgage rates track closely, reached about 5.2%, its highest since 2007. The move followed the Federal Reserve's quarter-point increase a week earlier, its first of the year, and it landed on the largest asset many advisory clients own.

Housing does not reprice the way a bond portfolio does, which is what turns a rate move into a planning problem. Higher borrowing costs shrink the pool of buyers who can afford a given property, and they discourage owners who locked in cheap mortgages from selling, the rate lock-in effect InvestmentNews cites. The house keeps looking substantial on paper while getting harder to convert into cash on a client's timetable, and the same rate level that thins the buyer pool for the family home also prices whatever the client buys next, which suggests the trade is harder to complete in both directions at once. The result, as InvestmentNews frames it, is an asset whose paper value and usable value have separated, and a plan that treats them as the same number is carrying a quiet assumption.

Ryan Botzong, a vice president and financial advisor at 49 Financial in Austin, works with clients whose residence accounts for 60% to 70% of net worth, and he now plans on the assumption that the equity in it is considerably less liquid than it has been historically. The fix is a short-term reserve in cash or bonds, which gives those clients room to maneuver if a sale is forced into a slower market rather than chosen. His read on the house itself has shifted with yields: with Treasury rates where they are, he told InvestmentNews, a home is more about utility — peace of mind, kids, gatherings — than investment growth, though he still allows that it can hedge inflation. For a buyer, his test is time: plan to stay in it rather than move house to house.

Jim Worden, chief investment officer at The Wealth Consulting Group in Las Vegas, goes further: in his view, clients generally should not treat the home as an investable asset in a portfolio or financial plan unless they have borrowed against it and invested the proceeds. PWD's records put his firm at $6.3 billion in regulatory assets across 21,593 accounts, with 52 registered representatives and 131 employees as of early October, so the position sits in front of a real book rather than a white paper. What he asks of advisors is narrower and harder than a valuation call: explain the risks of borrowing against any illiquid asset, and build enough slack into the plan to absorb the ordinary outcome that a home takes longer to sell than its owner expects and brings less than the owner hopes.

The distance between the two answers is smaller than it reads, because both come down to which column the house occupies. Botzong keeps the equity on the asset side and pays for the illiquidity with a reserve; Worden takes it off the investment side unless the client has already converted it into invested capital. Both close the same shortcut — carrying the house at its appraised value and counting on a sale if the spending plan needs one. When the same rate level removes buyers and freezes sellers, the market gets thinner, and the assumption that a client can sell in a given year is exactly the one this rate level calls into question.

Enforcing either version costs something: a cash or bond reserve held against a forced sale earns less than the equity it stands in for, so the advisor recommending it is choosing a lower expected return in exchange for a client who is not a price-taker on someone else's schedule — and a long bond at 5.5% is a genuine competitor for the inflation-hedge slot the house has filled. Worden's version is the harder sell of the two, because telling a client that the largest number on the balance sheet does not count as an investment is a conversation a household with 60% to 70% of net worth in one address will resist, particularly when the owners are among those holding a cheap mortgage that the current rate level has made worth keeping.

The question a plan can settle without forecasting is not what the house is worth but when the money could come out, and what the client's spending looks like if the answer arrives a year later than the plan assumed. That is a reserve-sizing exercise, and it is budgeted in the same currency as every other planning decision: expected return given up for a lower chance of a forced transaction. An owner who never intends to move is not exposed to any of this, and neither advisor suggests otherwise. The exposure sits with the household that has most of its net worth in one address and a spending plan that assumes the address can be converted.

It is the same species of work as the Dunham retirement-spending model this publication covered last week, in which a $1 million portfolio ran dry in year 34 at a 4% net return: an assumption that had gone unchallenged gets measured instead. Home equity has joined the inputs that need a defensible number rather than a comfortable one, and the advisors who get there first are the ones whose clients will not be learning the answer during a closing.

The 7.03% reading rewrites the inventory of assumptions an RIA carries: every plan that quietly lists the house as a funding source now carries a liquidity assumption that moved against it, and the clients most exposed are the concentrated ones the source describes. The cost falls on the advisor who has to name a date when the money could actually come out, and who has to say what the client's spending looks like if that date slips. The next Freddie Mac reading is what to watch: a quick drop back below 7% would let the old assumption return without anyone deciding to reinstate it.