Let’s say you would like to move but you’re handcuffed to your house by a low mortgage rate. If you move now, you’ll have to pay a much higher interest rate on your next home loan.
Sound familiar? It’s a situation that millions of Americans find themselves in. This chart shows the opening of a huge gap since the end of 2021 between rates on new 30-year mortgages and old loans – the stock of outstanding mortgage debt.
Cheap Mortgage Debt
People who like cheap mortgage debt aren’t putting their homes on the market at the rate they usually do. The inventory of existing homes for sale is equivalent to just 2.6 months’ worth of sales at the current pace of sales, about half its level a decade ago.
Good For Builders
The mortgage handcuffs on homeowners are good for homebuilders. With fewer people selling, some people who might have bought an existing home from a homeowner are instead buying a new home from a builder. Sales of new single-family homes rose in March, the Census Bureau reported on Tuesday. “The share of new homes in total home sales has risen to 13% from about 10% over the summer, and likely will rise a bit further in the months ahead,” Kieran Clancy, the senior U.S. economist at Pantheom Macroeconomics, wrote in a note to clients.
Fixed-Rate Mortgages
People who were lucky enough to take out a 30-year mortgage in December 2020 got an average rate under 2.7%, according to Freddie Mac. The national average is now around 6.4%. Given those changes, “unless you’re a person who needs to make a move, there’s little incentive to move now” (source Vanden Houten)
Home Equity
Many people have earned a substantial amount of housing equity. Even if they have low interest rates on their current loans, they may be willing to make a trade because they’re paying all cash for the next property. (source Jessica Lautz)
About 27% of buyers are paying all cash these days. Plus, many people who aren’t paying all cash are making large down payments that reduce higher mortgage rates. Some of those are retirees who are moving to smaller homes or cheaper parts of the country.
Bottom Line
The bottom line is that while interest rates matter, they are not the whole story. “While someone may have no intention of moving life changes happen. Marriage, divorce, a move for a job.” (source Jessica Lautz) That’s what keeps the market for existing homes from freezing up entirely when mortgage rates go up like this.
(excerpts from The New York Times, author Peter Coy)
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