99% of borrowers have a mortgage rate less than 6%
A specter is haunting the housing market: the specter of last year’s mortgage rates. The average interest rate on 30-year fixed-rate mortgages hit 7.10% on Thursday, the highest since November last year. Higher mortgage interest rates led to a fall in demand. Meanwhile, homeowners who have secured lower mortgage rates are choosing not to sell, reducing the inventory available. That means the market loses buyers who want to move up and sellers who want to move up, so this lock-in effect restrict both sides of the market.
“Record-low homeowner vacancy rates have essentially depleted the housing stock and significantly reduced supply,” analysts at Goldman Sachs wrote in a research note last week. “At the net, this indicates a muted impact [new build] Completions affect the current housing supply/demand balance and ultimately prices.”
Even if every single-family home under construction was completed and put on the market immediately thereafter, Goldman Sachs added, the supply of homes this month would still be below historical averages, despite the current pipeline of new homes under construction being historically large is.
With rates nearing their peak of 7.37%, homeowners who opted for lower rates during the pandemic housing boom (or earlier, since rates have been low for years) are choosing not to sell and their low rates of often 3% to be retained. Or less. According to Goldman Sachs 99% of borrowers have a mortgage rate less than 6% or the current market rateand about 28% of these have rates below 3%.
Think of it this way: If you have a $600,000 mortgage and your interest rate is 7%, your monthly principal and interest payments would be $3,992. But with the same loan size and a 3% interest rate, your monthly payment is just over $2,530 per month.
University of South Alabama finance and economics professor Bob Wood said wealth that he set a 15-year fixed mortgage rate of around 3% when he bought his home in Mobile, Alabama, in 2014.
“The way rates are going up so much right now just doesn’t make sense [to sell]’ said Wood.
Wood and his wife wanted to downsize, and after calculating the price a few times, they were happy with the numbers they saw. But now that prices have gone up, they’re paying almost twice as much for a smaller house in a sale. Wood said they’re “just not ready for that,” so they plan to hold off and wait for rates to go down.
“We have time for that, and it’s not critical,” Wood said wealth. “So we just think we’re going to see it through, and hopefully the market will move lower over the next 12 to 18 months.” As Goldman writes, they’re far from alone.
According to the National Association of Realtors, existing home sales fell 0.7% in January for the 12th straight month, with all regions reporting year-over-year declines. Additionally, according to Redfin, new car registrations fell 18.7% in January compared to the same period last year.
So it appears that inventories will remain tight and we may see larger falls as the 99% of borrowers whose rates are below current market rates are sticking with their old rates.
Retail District Manager Cory Kinman refinanced his Riverside, California home in August 2021 at around 2.42% interest after buying it at around 3.68% in 2016. Kinman tells wealth He saves around $500 on his monthly payments after the refinance. But he actually splits his time between California and Portland, Oregon after getting a new job. Rather than lose the low rate he’s locked up and sell his home, he rents an apartment in Portland and travels between the two states for work — which he says is cheaper because his mortgage payments are so cheap.
“I can’t afford to sell because I don’t want to lose this course,” Kinman said wealth. “If I ever want to move back to California, it will be impossible because I will never get a lower interest rate [than that]. So I’m scared as hell to let go of the house at that price, and I can’t afford to buy in Portland either because the prices and the rates are too high.”
If interest rates weren’t so high, Kinman said he would sell the house and buy it in Portland. Kinsman hopes to eventually buy a second property in Portland so he doesn’t have to give up his low interest rate — if he doesn’t find a job in California right away.
While Goldman Sachs expects the so-called lock-in effect to constrain the US housing market, the investment bank believes this will not be enough to halt the home price correction. Looking ahead, Goldman Sachs expects national house prices to fall 6.1% in 2023.
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