Homeowners say 5% is the magic number

After bottoming out at under 3% in January 2021, the average 30-year fixed-rate mortgage rate is now above 7%, which is too high for many homeowners to consider selling.

At today’s rates, most homeowners will need to finance a new home at a higher rate than the rate they are currently holding, adding hundreds of dollars per month to their mortgage payments. This created an incentive to stay where they are.

“Even if they buy a cheaper home, their payments will go up,” said Nicole Pacho, a senior economist at Zillow.

“Existing homeowners either can’t or don’t want to sell their homes because they can’t afford a mortgage on a new home,” Bachchu said.

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But there is a tipping point, recent reports have found: Homeowners are nearly twice as likely to sell their homes if their mortgage rate is 5% or higher, according to Zillow, and 71% of potential homebuyers planning their next home purchase with a foreclosure said. Mortgages They won’t accept a rate higher than 5.5% – that’s the “magic mortgage rate”, according to a survey by John Burns Research & Consulting.

Since interest rates are not likely to fall anytime soon, this has created what is called the golden handcuff effect. Similar to financial incentives that employers might offer to discourage employees from leaving the company, homeowners are now bound by lower mortgage rates.

Most homeowners today have mortgages with interest rates of less than 4% or even less than 3%, after moving or refinancing when prices hit record lows during the Covid pandemic.

There are currently “a large number of people who rely on very cheap mortgages,” said Thomas Philipson, professor of public policy studies at the University of Chicago and former acting chair of the White House Council of Economic Advisers.

Nearly 82% of home shoppers say they feel “trapped” by their low-rate mortgage, according to a separate study by Realtor.com.

Bob Wood, 66, was considering selling his Mobile, Alabama, home. The finance professor and his wife, Terri, purchased a 5,000-square-foot home with a pool nearly a decade ago.

“Maybe it’s time to cut back,” he told CNBC recently. They also wish to be closer to their grandchildren in Tennessee.

However, he said, “We are in year 10 of the 3.125% fixed rate 15-year mortgage.” They don’t want to move now and give up that low price to buy at a higher price. “We don’t want to pay that much interest,” he said.

Wood said it would be more likely to move if interest rates fell to the “4%-5% range.”

“The reality is that until inflation comes down in a meaningful and sustainable way, mortgage rates are going to stay high,” said Greg McBride, chief financial analyst at Bankrate.

Because of this, there is an acute shortage of homes for sale, with new listings year-to-date around 20% behind last year’s pace, which also adds pressure on prices.

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

From 1978 to 1981, mortgage rates doubled similarly from about 9% to more than 18%, forcing more homeowners to keep their homes.

However, “mortgage rates weren’t at record low levels in the late 1970s before they started to rise in the early 1980s, and house prices didn’t rise as quickly,” said Chanel.

He added that if history can be a guide, “there is a good chance that the housing market will regain its strength again, as it has in the past.”

“Although mortgage rates may not return to levels below 3% again anytime soon – if they do – there is no reason to believe that they will remain as high as they currently are forever,” said Chanel.

Sam Khater, chief economist at Freddie Mac, added: “Recent volatility makes it difficult to predict where interest rates will go next, but we should have a better gauge in September as the Fed outlines its next steps in terms of rate hikes.”

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