High Mortgage Rates Discourage Homeowners from Selling

After hitting 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.

With current rates, homeowners would have to finance a new home at a higher rate than their current mortgage, resulting in hundreds of dollars in additional monthly payments. Consequently, there is a strong incentive for homeowners to stay where they are.

“Even if they bought a cheaper house, their payments would go up,” explained Nicole Bachaud, a senior economist at Zillow.

Many existing homeowners are unable or unwilling to sell their homes due to their inability to afford a mortgage on a new home, Bachaud added.

Key Takeaways:

• More unmarried couples are buying homes together
• First-time homebuyers face unexpected financial challenges
• A significant percentage of adults live paycheck to paycheck

However, recent reports indicate that there is a threshold where homeowners become more willing to sell. Zillow found that homeowners are nearly twice as likely to sell if their mortgage rate is 5% or higher. Additionally, a survey by John Burns Research & Consulting revealed that 71% of prospective homebuyers would not accept a mortgage rate above 5.5% — this is known as the “magic mortgage rate.”

Given the unlikely possibility of rates dropping anytime soon, homeowners find themselves in a “golden handcuff” situation. Similar to the financial incentives employers use to discourage employees from leaving a company, homeowners are now bound by their low mortgage rates.

Currently, the majority of homeowners have mortgages with interest rates below 4% or even below 3%, which they acquired during the Covid pandemic when rates reached record lows.

“There is a stock of people sitting on very cheap mortgages,” said 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.

A separate survey by Realtor.com found that nearly 82% of home shoppers feel “locked-in” by their existing low-rate mortgages.

Housing Market Outlook

Bob Wood, a finance professor in Mobile, Alabama, has been contemplating selling his home. However, he and his wife are hesitant to give up their 10-year-old 3.125% 15-year fixed mortgage for a higher rate.

Wood stated, “We just don’t want to pay that much in interest.” He would be more inclined to move if rates were in the range of 4% to 5%.

“Until inflation comes down in a meaningful and sustainable way, mortgage rates are going to stay high,” warned Greg McBride, Bankrate’s chief financial analyst.

The shortage of homes for sale, coupled with slower new listings compared to the previous year, is also contributing to increased housing prices.

“In many ways, we’re in uncharted territory right now,” said Jacob Channel, senior economist at LendingTree.

While mortgage rates doubled from around 9% to over 18% between 1978 and 1981, there are key differences from the current situation. Mortgage rates were not at record lows in the late 70s, nor did home prices increase as rapidly.

However, Channel believes that the housing market will eventually regain momentum, as it has in the past. He added, “While mortgage rates may not return to sub-3% levels again anytime soon — if ever — there’s no reason to think that they’ll stay as high as they currently are forever.”

Sam Khater, Freddie Mac’s chief economist, stated that the Federal Reserve’s actions regarding interest rate hikes would provide a clearer indication of future rate movements.

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