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The premise of a mortgage rate lockdown is simple: so many American households have such low mortgage rates that some will never move once rates rise, which then locks up housing inventory. Said another way; A homeowner planning to relocate or downsize might find the higher costs related to higher mortgage rates too much of a hurdle to clear.

This is something I’ve never considered in my real estate career because we hadn’t had a period where mortgage rates moved up so quickly and then held higher for an extended period. But now this is a real risk.

For many Americans, homeownership became a reality during the years of ultra-low mortgage rates following the 2008 financial crisis, an environment that essentially lasted all the way up until the Federal Reserve's campaign to raise interest rates, which started last year. Many were even able to take advantage of refinancing opportunities as recently as 2021 or late 2020 when rates dipped below 3%. In fact, over 50% of all outstanding mortgages originated in 2020 or after.

That interest rate dynamic has now completely flipped on its head. Had you been fortunate enough to be able to buy or refinance during that low interest rate period, you are likely counting yourself lucky. For many, that low fixed rate now feels like a gift that keeps on giving.

However, that is not necessarily the case for everyone. For some, it may also start to feel like a sort of low-rate-induced house arrest — they feel trapped in their home.

Typically, we have a natural set of new listings each year; inventory rises in the spring and summer and then falls in the fall and winter. We are getting closer to that period where total inventory traditionally falls. What I don’t want to see in 2023, if mortgage rates stay high, is we start the year with more negative year-over-year declines in listings.

We have now entered a tricky period in housing economics where we might have to take this premise of “Mortgage Rate Lockdown” more seriously since mortgage rates recently got as low as 2.5% in 2021 and as high as7.11% in February of 2023.

It wasn’t the rate move that caught my attention — it was the new listing data.

It all started when mortgage rates jumped from 5.25% to 6.25% in 2022 and I saw how home sellers reacted to that move. That sharp move to 6.25% caused new listing data to stall at first. (This is the exact opposite of panic selling, by the way.)

My concern is that if mortgage rates fall in the future, it will stall, pause or even reverse the inventory growth we have seen in 2022. Traditionally speaking, post-2012, inventory growth came in years where demand was weaker from mortgage buyers: 2014 and 2022. Those were the only years we have had negative mortgage demand growth in the purchase application data. Adjusting to population, 2014 was the lowest level in the index ever, and in 2022 we saw a noticeable hit in this index, taking it below 2008 levels.

This is why 2023 will be key to the mortgage rate lockdown question. The nation’s inventory needs to get back to 2019 levels, and that will only happen with positive year-over-year new listing data going into spring 2023. The healthy parts of the U.S. housing market — where people have choices and buyers have some power again — are those near or above 2019 levels. We just need the entire country to get back there for me to remove the label of a savagely unhealthy housing market.

Can you blame home sellers?

One of the things that people forget about low mortgage rates is that we have people living in their homes much longer now. The epic wave of refinancing we saw during 2020 and 2021 improved homeowners’ cash flow much more than people think because their wages have risen over the years while their mortgage payment got lower. So, you can understand why some households didn’t want to pull the trigger when rates raced up toward 6.25% and why even 5%-6% mortgage rates on top of massive home-price growth has made them think twice about listing. Homeowners have excellent cash flow, and they are unlikely to make their financial life harder unless there’s a good reason.

While I have been skeptical of the mortgage rate lockdown premise over the years, it was more because rates didn’t stay high enough to have the premise genuinely tested. If mortgage rates head back toward 4%, that should entice some sellers to move, but at 6%, it makes sense why some sellers won’t pull the trigger.

Always remember, traditional sellers, for the most part, are homebuyers as well. So, to list their homes, they want to feel comfortable with mortgage rates to finance their next home.

Just the raw speed of the mortgage rate rise could have also taken traditional sellers off guard. This is a problem when you don’t have a functional mortgage market, because buying and selling your home is the biggest financial decision you will make. We need to be mindful of this when looking at housing data. When things settle down we might see more choices being made.

Locked into their homes.

The average 30-year fixed rate mortgage was 3.1% at the start of 2022. It has now approached 7%. The ability to relocate is starting to feel more like a far-fetched idea rather than a viable opportunity. The math for many no longer works.

Take for example the hypothetical homeowner who wants to move closer to family. They own a $1,000,000 home with $600,000 in equity. If they sell their home and buy a home of similar value, giving up their 3% mortgage and replacing it at the 7% rate, the new principal and interest payment on that $400,000 mortgage has gone up 58% from $1,265 to $2,661.

Mortgage Rate Math Doesn’t Work for ‘Move-Up’ Buyers

The math for a “move-up” buyer? It simply doesn’t work out. If a different homeowner instead was looking to sell a $400,000 condo and to buy a $600,000 home (so 20% more house), that would mean their monthly payment would go up 110% from $1,265 to $2,661. This is ignoring any increases in property tax or insurance.

Even those looking to downsize won’t catch a break in this new world of higher rates. Take the prior example, but this time consider an elderly homeowner who is struggling to maintain and get around in their larger home and is seeking to relocate to a smaller $400,000 home. Despite reducing their mortgage balance from $300,000 to $200,000, their new monthly payment will have increased from $1,265 to $1,331.

Real Estate Weekly Report (May 1st/2023)

These higher rates have definitely put a damper on home sales, which are down about 23% over the last year. Home prices are also now seeing the first year-over-year price drops (Though we have been seeing prices head downward for a good 10 months now).

The longer these high rates persist, we can expect more significant ripple effects throughout the economy, particularly in the context of limited job mobility. This dynamic could prove troublesome, especially in combination with the continued tight labor supply. Consider a homeowner seeking to move for a new job opportunity. Their potential employer will have to up the ante with even more incentives than before. This type of added wage pressure certainly doesn't help the Federal Reserve's efforts to reduce inflation.

Higher rates is something you should be especially sensitive to with housing prices continuing to be historically elevated. If you were to buy at this new higher rate and housing prices fell, you could find yourself in a situation where you no longer have enough equity in your home to refinance even if rates did fall.

Mortgage Rates are up, but Buying a Home Is Still a Good Investment

Even though mortgage rates are higher, mortgage loans are still one of the cheapest types of loans available, especially when you consider that you can claim a tax deduction for interest on your home loan if you itemize your taxes. Borrowing at such a low rate for an asset that should go up in value over time is likely to leave you better off financially.

Data from the U.S. Census shows one of the key reasons why buying a home is a good financial choice for most people, even if they can't qualify for rock-bottom mortgage rates. According to the Census, the median net worth of homeowners is 80 times the median net worth of renters.

Each month when you pay down your mortgage loan, you acquire more equity in your home. Eventually, over time, you come to own a valuable asset that is worth hundreds of thousands of dollars -- or even millions of dollars. That's not the case for renters when they pay rent.

Homes also tend to increase in value over the long term, so you acquire more equity as your property value rises. If you can make tens of thousands of dollars or hundreds of thousands of dollars of profit on the property you're living in, this will naturally leave you better off.

It's anyone's guess how these factors might intersect and shape the broader economic landscape moving forward. However, one thing is for sure — we are in for an interesting ride.

Marketing the home aggressively and using digital tools to reach potential buyers can also help generate interest in the home and increase the chances of a bidding war.

When buyers believe that a home is in high demand, they may be more willing to compete aggressively to secure it. This can be achieved through strategic marketing, such as listing the home as having an ‘offer deadline’ or by generating a lot of buzz through social media and other channels.

Related Links:

Real Estate Weekly Report - Market Movement

Some Homes Are Seeing Bidding Wars as Mortgage Rates Fall Again For 5th Week

The Average Long-Term Mortgage Rate Falls a Fourth Straight Week

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