Problem for the housing market: People won’t let go of their cheap mortgages

When Colleen Randall bought her home in 2016 for $174,000, she thought it was the perfect home to start. Then the past few years have made the deal even sweeter: I’ve doubled square feet after returning it Unfinished basement. Now the three-bedroom, three-bathroom home in Hagerstown, Maryland, has a minimum value of $260,000. A refinancing in 2020 also lowered its mortgage rate from 3.25 to 2.75% and canceled its mortgage insurance.

And that’s the problem.

Randall, 33, and her husband want to have a second baby, but their third bedroom is a sunny bedroom and it just won’t work for a new baby. They were just usually Looking to move and sell For someone else looking for a first home. But they can’t imagine giving up their very low rate for a new product The mortgage is above 6 percent on a larger home. Most likely scenario: delay having another child and stay.

“The mortgage payment would basically double if we bought a house of about the same size, with a better layout,” said Randall. “I just can’t do it. If I could predict the future, we’d probably stay where we are. It’s a very relaxing situation.”

Mortgage rates have risen above 7 percent as the Federal Reserve scrambles to slow the economy

People like the Randalls are everywhere, and they’re causing unexpected problems for the housing market. Home values ​​have skyrocketed in the past few years, as the pandemic has shifted housing needs, and buyers have demanded the few listings available. To quell that demand — and tame inflation across the economy — the Federal Reserve raised interest rates at the fastest pace in decades. Those moves sent mortgage rates up over 7 percent last fall, and while they have eased somewhat, the 30-year fixed rate is still around 6.35 percent, according to Freddie Mac.

But these increases are also He discouraged owners from putting their homes on the market and forfeiting The low rates at which they borrowed money before last year. This reduces the supply of homes, Especially for the traditional homes that helped first time buyers gain a foothold in the market a long time ago.

It is the perfect starter home. But it is only for rent.

“The world is getting back to normal, but we still have the fallout from what happened,” said Skylar Olsen, chief economist at Zillow. “This is causing the housing market to act this way.”

Balancing supply and demand in the housing market is key to controlling inflation. But experts say they don’t see the stalemate improving until prices fall. any It probably won’t happen until next year. Even still, the days of ultra-low interest rates are probably over for a generation of homebuyers who came of age when it was much easier to get a cheap loan.

The vast majority of homeowners have rates that are below the current average. At the end of 2022, 62% of mortgage holders had a rate of less than 4%, and 82% had a rate of less than 5%, according to Redfin data. A whopping 92 percent rate was less than 6 percent.

And the number of new listings hitting the market is well below normal levels, with millions of homeowners deciding not to budge. In February, listings were down more than 23 percent from a year earlier, according to Zillow, and more than 32 percent from pre-pandemic levels.

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The decline is more dramatic in certain areas. Listings in Winston, North Carolina, fell 65.6 percent in February compared to a year earlier, according to Zillow. In Milwaukee, it’s 49.6 percent. Listings in Las Vegas were down 39 percent, and in D.C., down 36.8 percent.

The drop in listings is unusual, even compared to before the pandemic. By that measure, listings in Winston fell by 67.3 percent, and in Las Vegas, by 45.9 percent.

In normal times, Knoxville, Tennessee, would have about 10,000 active listings at any given moment. But by the time Hansen Sale was shopping for his first home in late 2020 and early 2021, only 1,300 properties have been offered for sale. He still managed to buy a historic three-bedroom, two-bathroom home with a mortgage rate of 2.75 percent for $291,000.

The sale is working for the Knoxville Area Association of Realtors and see how the pandemic has supercharged the college town housing market. In 2021, the annual income needed to afford a median home with a 10 percent down payment was $55,677, according to his research. By the end of 2022, it was $88,808. So at 25, he can’t imagine giving up his status, and if he outgrows the house, he’ll rent it out.

“It would be difficult for me financially to move to another place,” Sale said. “It kind of froze me in a lot of ways. And even if I moved, it would probably hold on to a house like that, because the price is so low, and it would be a good investment to generate revenue.”

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Meanwhile, dozens of people are clamoring to find whatever homes are available, even if it means taking up a high rate.

Emily Engel and Tyler Young have been trying to buy their first home together for six months – ever since Engel’s landlord told her he wanted to sell the property where she lived. The long-distance couple was looking for a home in north central Connecticut for about $325,000. They lost six shows.

Last month, they were preparing to place in seventh place. But while they were on the phone with their real estate agent, they were told that someone else had just made a huge offer. The only way for Engel & Young to get back to the front of the line is to put in an additional $100,000 — cash.

“There’s an overwhelming feeling of hopelessness — that’s the word — that overwhelms me every time,” Engel said. “This is crazy. We’re not going to win. We’re not rich. We don’t have an extra $100,000. I’m almost 40. Aren’t you mature enough to own a house? You feel like a kid.”

Engel said she sees no signs of slowing demand in New England. But the housing market is very sensitive to changes in interest rates, And there are some indications that the Fed’s moves are working as central bankers intended. The median existing home price fell 0.9 percent in March from a year earlier, to $375,700, according to the National Association of Realtors. This marks the largest year-on-year price drop since January 2012.

Homes hitting the market are taking longer to sell, which helps build inventory and tame buyer frenzy from the earlier stages of the pandemic. Fed officials are betting that the slowdown will eventually spill over into the rental market, a crucial step because rental costs have become a major driver of inflation across the economy.

Federal Reserve Chairman Jerome H. Powell in February: “We haven’t seen that yet in housing services.” But we expect to see that. We need that to happen. This is another big part of the economy. He must come. It should come in the second half of this year.”

But prices probably won’t drop significantly until more homes are available. Experts have different estimates of the number of homes the country needs, With numbers sometimes ranging from 1.5 million to 5 million. Last year, the White House unveiled the Housing Action Plan, which aims to help bridge the nation’s housing shortage within five years.

Ongoing supply chain problems, labor shortages and rising construction costs have few experts hopeful that the plan will bear fruit. But the trend is at least moving in the right direction; The number of listings coming from new construction has been rising steadily since 2016. At the end of 2019, just before the pandemic, nearly 19 percent of listings came from new construction, according to Redfin data. By the beginning of 2023, that number had increased to more than 33 percent.

However, there is still a long way to go, especially when it comes to attracting people at extremely low rates.

Jonathan Levitt, 32, took advantage of remote work and moved from Boston to Boulder, Colorado, during the pandemic. In 2021, he purchased a three-bedroom apartment for $865,000. He locked in an interest rate of 3.05 percent, estimating that if he bought the same house today, The monthly payment will be at least $1,000 higher.

Levitt monitors Zillow listings, and sees other, less attractive homes in his neighborhood selling for $200,000 more than he paid. He invested money in upgrading the house – with solar panels, saunas, and exercise equipment. may rent it underline. But he can’t imagine selling or moving back into his old Boston apartment without outdoor space or parking.

“I’m losing money in this scenario, as opposed to winning,” Levitt said.

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