Are reluctant property sellers too attached to their low rates?
You’ve heard of golden handcuffs. This is when a company pays you generously to dissuade you from going to work elsewhere.
Some of us hold ourselves back with a different kind of golden handcuffs: low mortgage rates. Economists call this phenomenon the “rate lock-in effect”. They say rate lock-in happens when we tackle the low mortgage rates we got when we bought or refinanced our homes.
So we stay put, even when we aspire to move, downsize or relocate.
The lock rate is not victimless (and is not the same as “lock” an interest rate before taking out a mortgage). It’s keeping properties off the market at a time when demand for homes is outstripping the paltry supply, driving up prices and fostering cutthroat competition. First-time home buyers are particularly disadvantaged because they have no equity to convert into a down payment.
An effect that is difficult to quantify
But does rate locking really exist? And how many moves does it prevent? Economists have studied the subject for more than 40 years.
You don’t need a Ph.D. in economics to see that someone who got a 9% mortgage rate in 1974 would frown on selling and then buying a house seven years later when rates were 18%. But what about small increases in interest rates? In a 1987 article in The Review of Economics and Statistics, John M. Quigley of the University of California at Berkeley argued that a 35-year-old homeowner with a 10% fixed-rate mortgage would have a 50 % to move after eight years if rates remained at 10%. However, at rates of 12%, the probability of that owner moving out after eight years would drop to less than 40%; and 30% if the rates were to drop to 14%.
Research by Quigley and others in the 2000s and 2010s found more evidence of the lockdown effect, but researchers disagreed on the magnitude of the matter. The lockdown rate is difficult to measure as people choose to move or stay for several reasons. And hardly anyone pays attention to it until there is a sharp rise in mortgage rates.
Repair instead of moving on
Housing economists are now thinking about locking in rates. They believe that rapidly rising interest rates may prevent homes from being sold on the market.
- The 30-year mortgage rate climbed more than two percentage points in the first five months of the year, from 3.22% in early January to 5.27% in early May, according to Freddie Mac.
- Meanwhile, just 950,000 homes were for sale at the end of March, according to the latest data from the National Association of Realtors. Compare that to March 2019, a period of relatively stable rates before the pandemic, with an inventory of 1.67 million homes for sale.
In April, I asked housing economists about the effect of material shortages on house construction. After answering these questions, they brought the golden handcuffs.
“The ‘lock-in effect’ should be a serious consideration when trying to determine inventory progress,” Ali Wolf, chief economist for Zonda, a housing market research platform, wrote in an email. -mail.
Skylar Olsen, senior economist for online mortgage lender Tomo, described a scenario in which aging baby boomers may have taken advantage of low rates to borrow from own funds “to remodel the bathroom so it no longer has a tub – there is a walk in shower.” According to this explanation, Baby Boomers stayed in their remodeled homes instead of selling to Gen Xers and Millennials.
The low-rate refinance boom in 2020 and 2021 “has been an incredible opportunity to cut and lock in your costs, and I think locking in interest rates could actually be powerful,” Olsen told me.
Moving requires “a need and a helping hand”
Michelle Doherty, an agent for RLAH Real Estate in northern Virginia, said “there must be a need and a push” to persuade homebuyers to ditch the low mortgage rates they’ve gotten in any time from late 2019 to early 2022. Either your job displaces you, or the military displaces you, or you’ve outgrown this house,” she says.
A similar thought is expressed by Jodi Hall, president of Nationwide Mortgage Bankers, an online lender. Having a low mortgage rate “won’t stop people from moving if they’ve decided they need to buy a new house in a different area, a bigger house or whatever,” she says.
Hall and Doherty say people are less reluctant to forego low interest rates if they buy a cheaper home where the monthly payment is lower, even if the interest rate is higher.
Moreover, even as mortgage rates have skyrocketed, homeowners’ attitude toward selling hasn’t changed much. In Fannie Mae’s monthly Home Buying Sentiment Index, 21% of respondents in April said it was a bad time to sell – virtually unchanged from 22% in January. (Those who say it’s a bad time to buy have dropped from 70% to 76%).
People settle longer in general
Michael Neal, a senior research associate for the Urban Institute’s Housing Finance Policy Center, believes that rate freezes can be a factor that ties people to their homes, but adds that “we’re definitely running into this kind of change. longer term people are staying in their homes that came out of the Great Recession.
People are moving less than before and the trend started before the real estate crisis. According to the US Census Bureau, 9.4% of US households moved in 2018-2019. Thirty years earlier, 17.2% of households had moved. The “geographic mobility rate” has been on a downward trend since the 1960s, complicating efforts to pinpoint the role of rising mortgage rates.
Additionally, Neal points to rapidly rising home prices as another variable that may discourage homeowners from selling. According to the National Association of Realtors, the median resale price of a home in March was 15% higher than 12 months earlier. “Homeowners today are willing to sit on their equity,” Neal says. “I think that probably plays a bigger role” than mortgage rates.
So maybe the golden handcuffs work in pairs, like real handcuffs: one hand restrained by low mortgage rates, the other restrained by rapid equity growth.
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Holden Lewis writes for NerdWallet. Email: [email protected] Twitter: @@HoldenL.
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