After reaching a low of less than 3% in January 2021, the average rate for a 30-year fixed-rate mortgage has now risen above 7%. This increase is deterring many homeowners from considering selling their homes.
At the current rates, most homeowners would have to finance a new home at a higher rate than their existing mortgage, resulting in significantly higher monthly payments. This financial burden has created a strong incentive for homeowners to stay in their current homes.
Nicole Bachaud, a senior economist at Zillow, explains, “Even if they were to buy a cheaper house, their mortgage payments would still increase. These existing homeowners either cannot or are unwilling to sell their homes because they cannot afford a mortgage on a new home.”
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However, recent reports indicate that there is a specific tipping point for homeowners. According to Zillow, homeowners are nearly twice as likely to sell their homes if their mortgage rate is 5% or higher. Additionally, a survey conducted by John Burns Research and Consulting found that 71% of prospective homebuyers who plan to purchase a home with a mortgage would not accept a rate above 5.5%. This rate is considered the “magic mortgage rate.”
Higher interest rates created a ‘golden handcuff’ effect
Due to the unlikelihood of rates dropping anytime soon, a phenomenon known as the “golden handcuff” effect has emerged. Similar to financial incentives that employers use to discourage employees from leaving a company, homeowners are now bound by their low mortgage rates.
Most homeowners today have mortgages with interest rates below 4% or even below 3%, as they took advantage of record-low rates during the Covid pandemic by either moving or refinancing.
Tomas Philipson, a professor of public policy studies at the University of Chicago and former acting chair of the White House Council of Economic Advisers, explains, “Currently, there is a stock of people sitting on very cheap mortgages.”
According to a survey by Realtor.com, nearly 82% of home shoppers feel “locked in” by their existing low-rate mortgages.
Bob and Terri Wood, of Mobile, Alabama, with their grandson.
Courtesy: Bob Wood
Bob Wood, a 66-year-old finance professor, has been contemplating selling his home in Mobile, Alabama. He and his wife, Terri, bought their 5,000-square-foot house with a pool nearly a decade ago.
“It’s probably time to downsize,” Wood shared. They also wish to be closer to their grandchildren residing in Tennessee.
However, he expressed reluctance to move due to their current mortgage rate of 3.125% fixed for 15 years. They are not willing to give up such a low rate and pay higher interest on a new home. Wood stated, “We just don’t want to pay that much in interest.”
Wood would consider moving if rates were to come down to the “4%-5% range.”
Greg McBride, Bankrate’s chief financial analyst, explained, “The reality is, until inflation comes down in a meaningful and sustainable way, mortgage rates are going to stay high.” This high rate environment has contributed to a critical shortage of homes for sale and added pressure on prices.
Rates may not drop below 3% ‘anytime soon — if ever’
“In many ways, we are currently navigating uncharted territory,” said Jacob Channel, a senior economist at LendingTree.
Between 1978 and 1981, mortgage rates doubled from around 9% to over 18%, resulting in more homeowners holding on to their properties.
However, Channel points out that during that period, mortgage rates were not at record lows beforehand, and home prices did not increase as rapidly. He stated, “But if history is any guide, there is a good chance the housing market will eventually pick up steam again, just as it has done in the past.”
Channel also added, “While mortgage rates may not return to sub-3% levels again anytime soon—if ever—there is no reason to believe that they will stay as high as they currently are forever.”
Sam Khater, Freddie Mac’s chief economist, noted, “Recent volatility makes it difficult to forecast where rates will go next, but we should have a better gauge in September as the Federal Reserve determines their next steps regarding interest rate hikes.”
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