NEW YORK – The sharp rise in mortgage rates in 2022 has hampered housing affordability and led to a drop in home sales. Besides these obvious fallout, the rate hike has also created a surprise: many homeowners are choosing not to sell because they don’t want to give up the extremely low rates they’ve locked in in 2020 and 2021.
In the depths of the pandemic, many homeowners refinanced with mortgages at rates of 3% or less. Now that rates are around 7%, many are deciding to just stay put.
“Sellers are on strike,” says Mark Fleming, chief economist at title insurer First American.
Reflecting this scenario, the number of existing homes for sale in the United States fell to 1.11 million in September, from 1.14 million in August and 1.16 million in July, according to the National Association of Realtors (NAR).
Homeowners choose not to put their homes on the market for a variety of reasons. Some fear finding another house at an acceptable price or worry about the economic outlook. Fannie Mae’s Home Buying Sentiment Index fell in September, its seventh consecutive monthly decline, as soaring mortgage rates hamper affordability.
Forgoing a record rate doesn’t sit well with many homeowners either. Based on a 30-year repayment schedule, a borrower who took out a $400,000 loan last year at 3% is paying $1,686 per month. Borrowing the same amount at 7% increases the payment to $2,661, a jump of $975 per month, or 58%.
This led to what Robert Dietz, chief economist for the National Association of Home Builders, calls the “mortgage foreclosure effect.”
“If you have a 2% or 3% mortgage rate, you’re unlikely to give up on that note,” Dietz says.
Some 85% of US homeowners with mortgages have interest rates below 5%, according to Redfin, which found that in Atlanta, Chicago, Los Angeles and Washington, D.C., homeowners with rates below 3.5 % were 7.6% less likely to put their home up for sale in August than those with a rate above 3.5%.
The lack of houses for sale is helping to support prices, but this new state of mind is playing on a sharp slowdown in activity. Existing home sales fell again in September, the eighth consecutive month of declining sales volumes, according to NAR.
Although home values have cooled in recent months, they remain near record highs. In theory, a stock-rich homeowner could sell and apply the gains to a down payment on a new home, reducing the monthly mortgage payment.
However, all that equity does little to pick up the pace of home sales, which have been falling steadily in 2022. While there are homeowners who have to sell due to job changes, a divorce, death or other circumstances, for now, those who do not choose not to.
“With rates above 6.5% for three weeks and no indication that they will drop before the end of the year, people are only buying and selling houses when they need to,” says Chen Zhao. , economist at Redfin.
The average 30-year mortgage rate rose to 6.92% last week, according to Bankrate’s national survey of major lenders, the highest rate since 2006. A year ago, the mortgage at 30-year fixed benchmark rate was 3.22%.
The abrupt move was primarily driven by the Federal Reserve. At the start of the pandemic, the Fed cut rates to zero to stimulate the economy, and mortgage rates responded by plunging to record lows.
The next phase of the economy, however, saw the highest levels of inflation in four decades. The Fed responded with war, and its third straight three-quarters percentage point hike in September created upward pressure on mortgage rates.
The Fed does not directly control fixed mortgage rates; the most relevant measure is the 10-year Treasury yield, which has also risen.
With inflation still high and the Fed poised to keep raising rates, higher mortgage rates look likely.
“Inflation remains high, so interest rates will have to rise,” said Greg McBride, chief financial analyst at Bankrate. “With the 10-year Treasury yield rising above 4%, mortgage rates are on the rise and are reaching 20-year highs.”
Many homeowners are coping with rising rates in part by staying in their homes. Others accept higher rates and dip into their home’s equity for renovations and other uses. This strategy allows you to keep the lowest rate on your main mortgage. You’ll pay a higher interest rate with a home equity loan or line of credit, but for now it might make more sense to go that route and not touch your first mortgage rate of 3%.
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