High cost of upgrading to a nicer home is locking up the market

The spring housing market defies expectations that prices would fall and competition would ease.

Higher mortgage rates generally cool prices and demand, as was the case last year, but that is not the case now. There are still too few homes for sale because current owners cannot afford to move, which keeps prices high.

House prices in February were 5.5% higher than in February of last year, according to CoreLogic. This annual comparison is down slightly, but the price increase from January to February was nearly twice what it normally is for this time of year, suggesting that this spring’s market has begun in strength despite higher interest rates.

The average rate for a 30-year fixed-rate mortgage reached its latest peak in October, briefly surpassing 8%. It then fell back into the 6% range for much of December and all of January. It rose by more than 7% in February, which should have cooled the market.

But sales of newly constructed homes, which count toward contracts signed during the month, were up nearly 6% in February from a year ago. Pending sales of existing homes, also based on signed contracts, were down 7% that month from a year earlier, but that wasn’t for lack of demand.

Lock effect

The real problem with the existing real estate market today is the lack of supply. There are more new listings this spring than last year, but supply is still 40% below its pre-pandemic level.

Part of the reason is that current homeowners face a lock-in effect: they don’t put their homes up for sale because the cost of moving is so high.

In the 22 years before the Federal Reserve began raising rates in 2022, upgrading a home that was 25% more expensive would have increased a homeowner’s average monthly principal and interest payment by 40%, or about $400 on average, according to ICE Mortgage data. Technology. Moving to a similar house across the street would not change their payment.

Unlike today, the average homeowner with a near-record mortgage rate would see their monthly payment increase by 132%, or about $1,800, in order to afford a home 25% more expensive. According to ICE, buying the same home they are currently in would increase their monthly payment by 60%.

These increases represent national averages and may vary from market to market. For example, upgrading would add $604 to a homeowner’s monthly payment in Buffalo, New York, a 108% increase; and $4,517 in San Jose, California, an increase of 161 percent, according to ICE data.

“Lower rates would make the calculation easier for many and more reasonable. But the net result continues to be too few homes for too many buyers,” said Andy Walden, vice president of corporate research. of the ICE. “Until this fundamental mismatch is resolved, simple supply and demand will continue to weigh on inventory and affordability.”

What rate would unlock the market?

If rates fell to 6 percent, the increase in monthly payments to trade in a home up to 25 percent more expensive would go from an average jump of 103 percent to 88 percent — a modest but welcome improvement, according to Walden.

If rates fell to 5%, an increase would require a 68% higher payment, still well above the long-term average of 39%, but perhaps enough to motivate someone with a compelling need or desire to switch at a higher level.

While not all borrowers have historically low rates, there are more of them in expensive markets because the break-even cost of a refinance is generally lower for borrowers with higher balances, so they are more encouraged to do so. They also likely have a higher loan balance, so moving to a higher rate would be even more costly. This is why the foreclosure effect is strongest in much of California, where housing is most expensive.

The vast majority of borrowers today, 88.5%, have mortgages with rates below 6%, according to Redfin. About 59% have rates below 4% and nearly 23% of homeowners have rates below 3%.

These shares are slightly lower than last year, because some people chose to move over the last year, but it shows what the market is facing, especially given high and still rising prices real estate.

A new report from Zillow shows that the United States now has a record 550 “million-dollar” cities, or towns where a typical home is worth $1 million or more. That’s 59 more millionaire cities than there were in 2023, when home values ​​were weakening due to rising mortgage rates.


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