99% of borrowers have mortgage rates below 6%

There is a specter haunting the housing market: the specter of last year’s mortgage payments. The average 30 year fixed mortgage rate hit 7.10% on Thursday, the highest reading since November last year. Higher mortgage rates cause a decrease in demand. As homeowners locked into lower mortgage rates choose not to sell, available inventory tightens. That means the market is losing buyers looking to go up and losing sellers looking to go up, so this lock-in effect is the control on both sides of the market.

“Record low home owner vacancy rates are causing home inventory to deplete and materially tightening supply,” Goldman Sachs analysts wrote a research note last week. “On the net, it means a muted effect from [new build] completing the current housing supply/demand balance and, ultimately, prices.”

Although every single-family home built was completed and listed on the market soon after, Goldman Sachs added, the supply of homes in the month is still below historical averages, even today. pipeline of new homes being built is great in history.

With rates approaching their peak of 7.37%, homeowners who locked in lower rates during the Pandemic Housing Boom (or earlier, as rates in many years), choose not to sell and keep their prices low, usually at 3% or less. According to Goldman Sachs, 99% of borrowers have a mortgage rate lower than 6% or the current market rateand about 28% of those have a rate of less than 3%.

Think of it like this, if you took out a $600,000 loan and your rate was 7%, your monthly principal and interest payments would be $3,992. But with the same size loan and a rate of 3%, your monthly payment will be less than $2,530 a month.

Professor of finance and economics at the University of South Alabama, Bob Wood, said luck that he locked in a fixed 15-year mortgage rate of about 3% when he bought his home in Mobile, Alabama, in 2014.

“The way the rates have gone up so much right now, it’s absurd [to sell],” said Wood.

Wood and his wife were looking to downsize, and after pricing it out a few times, they were happy with the numbers they saw. But now that rates have gone up, when they sell, they pay almost twice as much for a smaller house. Wood said they “just don’t want to do that,” so they plan to hold off and wait for rates to moderate.

“We have time to do it, and it’s not critical,” Wood said luck. “So we’re just thinking we’ll ride it out, and hopefully in the next 12 to 18 months, the market will slow down.” As Goldman writes, they are far from alone.

In January, existing home sales fell 0.7%, for the twelfth consecutive decline, with all regions experiencing a year-over-year decline, according to the National Association of Realtors. In addition, the number of new listings fell 18.7% in January compared to the same time last year, according to Redfin.

So it looks like inventory will remain tight and we may see further declines, as 99% of borrowers with rates below the current market rate keep their old rates.

Retail district manager, Cory Kinman, refinanced his Riverside, California home in August 2021 with a rate of around 2.42% after purchasing it in 2016 at around 3.68%. Kinman said luck he saved about $500 on his monthly payment after refinancing. But he actually splits his time between California and Portland, Oregon, after getting a new job. Instead of losing his low rate he foreclosed and sold his house, he rented an apartment in Portland and commuted between the two states for work—which he said was cheaper because of what his debt repayments are reasonable.

“I can’t sell because I don’t want to lose that rate,” Kinman said luck. “If I wanted to go back to California, it would be impossible because I would never get a lower rate [than that]. That’s why I’m afraid to let go of the house at that rate, and I also can’t buy in Portland because the price and the prices are too high.

If prices weren’t so high, Kinman said, he would sell the house and buy one in Portland. Kinman hopes to eventually buy a second property in Portland, so he doesn’t have to give up his low rate—if he can’t find work right away back in California.

While Goldman Sachs expects the so-called lock-in effect to prevent the US housing market, the investment bank does not think it will be enough to stop the house price correction. Going forward, Goldman Sachs expects national home prices to fall 6.1% in 2023.

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