Homeowners say 5% is the magic number

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

At today’s rates, most homeowners would need to finance a new home at a higher rate than the rate they currently hold, adding hundreds of dollars a month to their mortgage payment. That has created an incentive to stay where they are.

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

“These existing homeowners either can’t or are unwilling to sell their home because they can’t afford a mortgage on a new home,” Bachaud said.

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But there is a tipping point, recent reports found: Homeowners are nearly twice as willing to sell their home if their mortgage rate is 5% or higher, according to Zillow, and 71% of prospective homebuyers who plan to purchase their next home with a mortgage said they would not accept a rate above 5.5% — that is the “magic mortgage rate,” according to a survey by John Burns Research and Consulting.

Since it’s unlikely rates will drop anytime soon, this has created a so-called golden handcuff effect. Similar to the financial incentives employers may offer to discourage employees from leaving a company, homeowners are now bound by their low mortgage rate. 

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

Currently, 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. 

Nearly 82% of home shoppers said they felt “locked in” by their existing low-rate mortgage, according to a separate survey by Realtor.com.

Bob Wood, 66, has been thinking of selling his home in Mobile, Alabama. The finance professor and his wife, Terri, purchased the 5,000-square-foot house with a pool nearly a decade ago.

“It’s probably time to downsize,” he recently told CNBC. They would also like to be closer to their grandchildren in Tennessee.

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

Wood said he’d be more likely to move if rates came down to “the 4%-5% range.”

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

Because of that, there is a critical shortage of homes for sale, with year-to-date new listings roughly 20% behind last year’s pace, which is also putting more pressure on prices.

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

Between 1978 and 1981, mortgage rates similarly doubled from around 9% to more than 18%, compelling more homeowners to hold on to their homes.

However, “mortgage rates weren’t at record lows in the late ’70s before they started to skyrocket in the early ’80s, nor did home prices increase as rapidly,” Channel said.

But if history is any guide, “there is a good chance the housing market will eventually pick up steam again like 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,” Channel said.

“Recent volatility makes it difficult to forecast where rates will go next, but we should have a better gauge in September as the Federal Reserve determines their next steps regarding interest rate hikes,” said Sam Khater, Freddie Mac’s chief economist.

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