Bob and Terri Wood, residents of Mobile, Alabama, are contemplating selling their home. The couple, who bought the spacious 5,000-square foot house with a pool nearly a decade ago, believes it’s time to downsize and be closer to their grandchildren in Tennessee.
However, they face a dilemma. They currently hold a 3.125% 15-year fixed mortgage, which they secured 10 years ago. Moving now would mean giving up their low rate and purchasing a new home at a higher rate, resulting in significantly higher interest payments. They are hesitant to pay more in interest.
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, states that Bob Wood is among many homeowners who have taken advantage of historically low mortgage rates.
For these homeowners, financing a new home at a higher rate than their current mortgage would mean a substantial increase in their monthly payments. Choosing to stay put in their current homes is seen as the best strategy in this situation.
Considering the rising home prices and interest rates, Philipson advises consumers to stay in their current homes rather than moving.
The “Golden Handcuff” Effect of Rising Rates
A house for sale in Arlington, Virginia, in July of 2023.
Saul Loeb | AFP | Getty Images
The recent surge in mortgage rates has caused what’s known as the “golden handcuff” effect. This term is typically used to describe financial incentives offered by employers to discourage employees from leaving a company. For homeowners, a low mortgage rate creates a similar situation.
Due to historically low rates, a majority of homeowners currently have mortgages with interest rates below 4% or even below 3%. According to a survey by Realtor.com, nearly 82% of home shoppers feel “locked-in” by their existing low-rate mortgages.
As a result, there is a significant shortage of homes for sale, with new listings falling behind last year’s pace by approximately 20%.
The Tipping Point: 5% Interest Rate
After reaching a low of 2.93% in January 2021, the average rate for a 30-year fixed-rate mortgage is currently hovering around 7%, as reported by Bankrate.com.
Bob Wood mentions that he would be more inclined to move if rates dropped to the range of 4% to 5%. A report by Zillow indicates that homeowners are twice as likely to sell their homes if their mortgage rates exceed 5%. However, 80% of mortgage holders currently have rates below 5%. As rates are unlikely to decrease in the near future, the housing market may remain stagnant for now.
“Until inflation decreases in a significant and sustainable manner, mortgage rates are likely to remain high,” warns Greg McBride, Bankrate’s chief financial analyst.
Meanwhile, the shortage of available homes for sale is driving up prices.
Sam Khater, Freddie Mac’s chief economist, states that potential homebuyers are finding it difficult to afford homes. Homeowners, on the other hand, are hesitant to sell their homes and lose their low rates.
‘Uncharted Territory’
“We are currently navigating through uncharted territory,” says Jacob Channel, senior economist at LendingTree.
In the late 1970s and early 1980s, mortgage rates doubled from around 9% to over 18%, prompting homeowners to hold onto their properties. However, during that time, mortgage rates were not at record lows, and home prices did not increase as rapidly.
“Mortgage rates may not return to sub-3% levels again anytime soon — if ever.”
Jacob Channel
senior economist at LendingTree
However, there is a possibility that the housing market will eventually regain momentum, similar to past trends. Although mortgage rates may not reach sub-3% levels again, there is no reason to believe they will remain as high as they currently are forever. Once rates start to decrease, the housing market is likely to become more active again.
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