Spring House Hunt
“It’s quite difficult to trade today. You’re going to pay more for the house and you’re going to pay a lot more for the mortgage.
Mortgage rates have more than doubled in three years. Adobe Stock
The disparity between the low mortgage rates homeowners enjoy on their current home and the significantly higher rates they could get on a new property is turning homeownership in the United States into something of a loophole from which millions people cannot go out.
In mid-April, mortgage rates jumped above 7 percent for the first time since November, a reminder of how stubbornly high they remain. Buyers were able to get 30-year fixed-rate mortgages below 3% as recently as 2021, meaning rates have more than doubled in less than three years, according to Freddie Mac data.
In the United States, 96% of buyers have a fixed-rate mortgage — and 63% of that group have a mortgage rate below 4%, according to a March report from the Federal Housing Finance Agency. This means that a large group of buyers simply cannot afford to move because, by swapping their existing mortgage for a new one at today’s higher rates, homeowners would end up spending around $500 more per month according to current financing conditions.
Ninety-two percent of Boston homeowners face mortgage “rate lock-in”; They are reluctant to give up their existing home and lower the mortgage rate for a new property at today’s higher costs, according to Zillow data.
“It’s quite difficult to trade today. You’re going to pay more for the house and you’re going to pay a lot more for the mortgage,” said Elaine Bannigan, a broker with Douglas Elliman. “It’s a pretty tough pill to swallow for this exchange market. He’s the one who’s hurt the most.
South End resident Nancy Farrington has lived in her condo in a full-service luxury building since 2021, when she was able to get a 30-year fixed-rate mortgage at 2.5%. Farrington plans to eventually return to her hometown of Charleston, South Carolina, but she doesn’t believe her condo will sell quickly when it goes on the market this summer.
“Nowadays, who is going to take out an 8% mortgage? » said Farrington. “I was all for three rate cuts this year, but I’m not counting on any rate cuts or any Fed action. This makes me very pessimistic, but then again, I’m Catholic and a Red Sox fan, so I’m always pessimistic.
Life changes take a back seat
A survey conducted last month by John Burns Research & Consulting asked prospective buyers what was stopping them from purchasing a home. Expectation of lower mortgage rates was the top factor, eclipsing “expectation of life stage change” as the No. 1 reason for the first time since the consultancy began surveying buyers in March 2023.
“Historically, the primary reason households move is life change,” said Alex Thomas, senior research analyst at John Burns. “I’ve heard people call it the four D’s: death, divorce, diamonds and diapers. This is usually why people move. It is not always primarily a financial motivation.
Even mortgage rates hovering around the 7 percent mark are well below the figures north of 18 percent seen in the 1980s, but buyers then faced house prices significantly lower than those of Today. Home prices broke records in March, according to the latest data from the Warren Group.
Mortgage “rate lock” has several trickle-down effects, according to the FHFA:
Beyond the 30 years set
But there are potential solutions and strategies for those who want to break away from the mentality that a 30-year fixed-rate mortgage is the only way to buy a home.
According to Bannigan, today’s buyers fall into three categories: first-time buyers, trade-in buyers and luxury buyers. Buyers of luxury goods can often pay in cash. Buyers of replacement products can afford to stay put because their purchase is often discretionary. First-time buyers are changing strategy.
“They desperately want to buy, but they’ve had to readjust their expectations because they can afford less today than they would have at lower rates,” Bannigan said. “There is so little inventory at their price points that these buyers have concluded this is not their last home. Therefore, in order to enter the market, they recognize that interest rates cannot remain this high forever.”
Mortgage rates can be volatile, but housing prices rise steadily. It’s better to get in today, even at a less-than-desirable mortgage rate, rather than wait for prices to climb even higher, the thinking goes.
These buyers are considering different financing options, including adjustable-rate mortgages that can be refinanced at a lower rate, it is hoped, once things are settled.
Relief won’t come overnight, but there are signs that there is room to lock in mortgage rates.
“Everyone was waiting for this moment when rates would go down, which actually never happened,” said Susan Bevilacqua, a Wellesley-based real estate agent with Douglas Elliman, who has seen buyer activity pick up in recent months. . “I feel like people are just tired of waiting and they’re doing what they need to do to make it work.”
Baby boomers who are not necessarily luxury home buyers – particularly those living in more affordable housing markets – may also be less vulnerable to rate lock-ins because they have already built up equity in their homes and paid off their mortgage. About 11 percent of baby boomer homeowners in the Boston metro area are unaffected by the rate freeze, while nearly 38 of them in Pittsburgh are immune to it, according to Zillow.
“Early this year, we saw a big increase in new listings in our data,” said Orphe Divounguy, senior economist at Zillow. “Our research shows that the increase in new listings has been most pronounced in the type of retirement community where there are many baby boomers who have no mortgage debt.”
An increase in buying and selling in high-priced Wellesley and retirement communities in the United States might not be joy to the ears of younger or price-sensitive buyers. But more affordable housing is also expected to begin returning to the market as the broader buyer pool coalesces around a new normal. It probably won’t be a mortgage rate lower than 3 percent. Rates may not collapse, but we hope they don’t rise as quickly as they have over the past two years.
“If we see less volatility, that will be a good thing for the real estate market,” Divounguy said.
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