The mortgage rate trap is making the housing market worse
Within the last couple of years, mortgage rates have been historically low. At the start of 2022 we were seeing signs of mortgage rates starting to climb, and with inflation, there is even more promise that mortgage rates won’t get better any time soon. One big factor that helped numerous homeowners save money is ultimately hurting homebuyers. Yahoo! News is calling it the interest rate trap. No earlier than January of 2022 I blogged about how mortgage rates were on the rise, The U.S. Mortgage Rates Hit The Highest Level in Two Years explaining how the rate on your mortgage can make a huge difference in how much home you can afford and what the size of your monthly payments will be during the life of the loan. Back in early January, Yahoo Finance mentioned that mortgage rates increased during the first week of 2022 to the highest level since May 2020 and are up more than half a percent since January 2021.
In a recent article with Yahoo! News they say that with years of historically low rates, specifically within the last two years, has actually helped several if not millions of homeowners refinance into mortgages with rates between 2% and 4%. This has allowed them to have lower monthly payments by hundreds of dollars.
However, they go on to mention that,
Now as mortgage rates near 5%, these same homeowners are thinking twice when it comes to trading up, adding to the inventory shortage that is creating an affordability crisis for buyers. Existing homeowners have a disincentive to sell because every dollar borrowed costs more,” Mark Fleming, chief economist at First American Financial Corporation, told Yahoo Money. “The financially rational decision is not to sell.”
And, Yahoo! Money has added that, Housing affordability 'is the worst it's ever been,' Yahoo! News adds that just this time one year ago, "the rate was at 3.13%. It reached an all-time low of 2.65% in January of last year". Millions of homeowners during that time decided to jump on the chance to grab a historically low rate.
This week however, the mortgage rate on the 30-year fixed mortgage hit 4.72%, the highest level since December 2018, according to Freddie Mac.
The connection between Mortgage rates and home sellers
With mortgage rates as high as they are now, what does mean for home sellers? As mortgage rates near 5%, these same homeowners are thinking twice when it comes to trading up. Or other words, sell their existing home and buying another home.
Now, only 14% of homeowners with a mortgage have a rate of 4.75% or higher — where Freddie’s Mac measure is roughly now. They are also the only pool of homeowners who could sell their house now and buy another at a rate that is similar to what they have — if all the transactions fall in place before rates rise again, an iffy feat given that rates have moved up at the three-month fastest clip since May 1994, per Freddie Mac.
Says Yahoo! News, as well as adding that, the remaining 86% of the homeowners are deciding to sit tight with a mortgage rate of 4.625% or lower. In other word “There is greater disincentive to move and replace their current mortgagee that likely has a lower fixed rate, lowering housing turnover,” according to a BofA Global Research note.
How much can the mortgage rates impact a home seller?
Home buyers are often the ones that are at the mercy of mortgage rates, but homeowners who have the intention to sell are just as vulnerable. Chances are, if you plan to sell, you’ll have to buy too. Yahoo News continues about just how much home sellers have decided to hold back on selling because of the current mortgage rates
Take a homeowner with a $100,000 mortgage at 3%. That homeowner pays $3,000 a year in interest payments on a 30-year fixed rate mortgage, Fleming said. If that same homeowner sells their existing home and purchases another home for $100,000 at 4.5%, the homeowner would pay $4,500 a year — that’s $1,500 more, or $125 more per month."So why bring my home to market to sell and become a buyer right away when it will cost more per month?" Fleming said. And that’s what happening — would-be sellers aren’t selling.
And although we are still facing low inventory of homes for sale it is still pushing prices up. "While the re-acceleration of home price gains may be concerning, and likely discouraging for first-time and younger buyers, it is nevertheless unsurprising considering the dire inventory of for-sale homes, which continues to decline and continually record new lows," Selma Hepp, deputy chief economist at CoreLogic, said in a statement.
While a home seller would get a great price for their home, buying another means facing rising mortgage rates, higher prices on the trade-up home, and an ultra competitive market due to low inventory — a vicious cycle that continues to dissuade homeowners from selling. This in the end will allow the market slow both the demand and supply, Berson said in Yahoo News