As rates rise, metro Atlanta consumers, companies reposition selves

With the cost of borrowing on the rise — and the potential for continued increases in the wake of recent maneuvering by the Federal Reserve — metro Atlantans are recalculating plans ranging from home purchases to investments to corporate borrowing.

Anyone who borrows, lends or invests money has been confronted with the rising cost of capital. Some transactions have become more expensive, others more profitable — depending on which side of the equation you are on.

Matt Miller and his wife have owned a home in Tucker for seven years, but wanted a little more space for themselves and their 4-year-old. They figured to start shopping for a new home this coming winter.

“When we saw the rates jump in June, we decided to move that up a bit,” Miller said.

Mortgage rates tend to ride parallel to rates on long-term bonds and securities. And the higher mortgage rates go, the more a loan requires the borrower to pay each month. So if a borrower can pay only so much a month, higher rates mean borrowing less.

Miller and his wife picked a house in the Briarlake school district in unincorporated DeKalb. In early September, they locked in their mortgage at 4.75 percent. But those several months of watching rates go up had changed the search.

“I would say that if the rate was still 3.5 percent, we would have looked at a wider range of houses,” he said. “The increase knocked about 10 percent off the maximum price we would pay.”

They didn’t want to bet that rates would retreat, he said. “My guess is that by next spring, the rates will go up significantly.”

Rates were low because growth has been weak, and because the Federal Reserve has been buying tens of billions of dollars in long-term bonds and Treasurys each month in an effort to stimulate the economy.

But earlier this year, Fed Chairman Ben Bernanke and other officials started talking about “tapering” — decreasing — their purchases.

The markets didn’t wait, said Blair Rothstein, investment adviser at Register Financial Associates. “The last few months, it’s the talk of tapering — not even the tapering itself — that has made the interest rates jump up faster than anticipated. It’s on everybody’s mind.”

The 10-year Treasury, for example, rose from 1.66 percent yield in early May to 2.86 percent last week — a 72 percent increase. In that same period, the average rate for 30-year mortgages rose 36.4 percent to 4.57 percent.

Bernanke emerged from a two-day meeting last week to announce that the Fed isn’t quite ready to start that pullback, partly because it fears that higher mortgage rates will dampen economic growth. Sooner or later, the Fed is expected to slow its bond-buying. But Fed officials said the economy still needed some help.

Then again, higher mortgage rates aren’t the only factor affecting whether potential homebuyers leap into the market, said Rajeev Dhawan, director of the Economic Forecasting Center at Georgia State University. “Do people believe that home prices are going to keep rising at double-digit clips? If they do, then rates don’t matter at all.”

But they may matter more in metro Atlanta than most other places, said Jeff Korzenik, chief investment strategist for Fifth Third Bank, which has 29 banks in metro Atlanta. “Atlanta is a little bit more sensitive to changes in real estate, both boom and bust.”

Atlanta was more dependent on housing during the expansion, and so it was hurt more than most when the housing market collapsed. Now, with housing on the rebound, Atlanta is leaning on it again for growth.

“The recovery will have an oversized impact in Atlanta,” Korzenik said.

Todd Hager, president of Edward Andrews Homes, said he already sees the impact on potential buyers.

“It comes down to what their monthly payment is, period,” he said. When rates go up, consumers often have to look at smaller homes or less attractive neighborhoods. “It kind of dampens their enthusiasm for a while.”

Zac Pasmanick, broker at RE/MAX Metro Atlanta, said the market — at least intown — has not been derailed by the increase in mortgage rates.

“There are still multiple buyers,” he said. “I haven’t heard anyone say, ‘I need to buy before rates go up an eighth of a percent.’ If it climbs an eighth of a percent a month, month after month, that’s different.”

Josh Moffitt, president of Silverton Mortgage Specialists in Midtown, said the reaction of homebuyers has varied by location.

“Overall demand did not drop for us, but certain markets and neighborhoods are better than others and some buyers did get frustrated. They are still looking, but they may be looking at other things.”

Low rates also have been a spur to refinancing — a way for some homeowners to save money each month or even trade equity for spending cash. But refinancing has been hit much harder than homebuying, said Matt Rhodes, owner of The Forem, an Atlanta real estate company that handles sales and purchases, as well as mortgages.

Since rates started rising, “the volume of home refinancing has been almost cut in half,” he said.

For investors, the rising arc of rates has forced a shuffling of portfolios.

Many — especially affluent retirees — want safety and an assured return. But if they have money in long-term bonds, they risk getting locked into rates lower than where the market is headed. Also, as rates rise, the value of the bonds falls.

So investors have been shifting to shorter-term bonds, which have a lower return but offer a quicker exit, said Ron Hart, managing director, Morgan Stanley in Atlanta. “If you own long-term bonds, you own them because you think yields are going lower. We think rates will slowly move higher.”

Rick Rieder, chief investment officer for BlackRock, an investment management firm, said investors are looking for the right mix.

A lot depends on an investor’s goals — which usually ride on age and wealth, he said: Older investors probably need to trade the dependability of fixed income assets for a higher return.

“We have been discussing with our clients how to reduce their interest rate sensitivity,” he said.

Changing rates also are affecting businesses, which are moving to lock in borrowing rates before they go higher — or counting their losses from having delayed.

Alpharetta-based SWM International has operations in Europe, Asia and the United States making paper — mainly for cigarettes. To fund the $800 million-a-year business, SWM needs to borrow money regularly, said Ashish Advani, director of treasury and international tax.

“As long as interest rates were crawling along the bottom, we were happy with that,” he said.

Advani said he thought rates would rise, and in April, he suggested locking in their rate. Company officials discussed the question but took no action. Sure enough, in May, rates started climbing, he said. “It is a direct hit to the bottom line.”

The increase of 1 percentage point added about $1.5 million to the company’s interest costs. But late in the week, the company was poised to lock in its rate, Advani said. “I still believe that the chances of interest rates going up are higher than the chances that interest rates are going down.”

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