Mortgage rate trap is making the housing market worse

A big factor that has helped numerous homeowners save money is ultimately hurting homebuyers. Call it the interest rate trap.
Years of historically low interest rates, particularly in the last two years, have helped millions of homeowners refinance into mortgages with interest rates between 2% and 4%, cutting their monthly payments by hundreds of dollars.
Now that mortgage rates are nearing 5%, those same homeowners are thinking twice when it comes to trading, contributing to the inventory shortage that is creating an affordability crisis for buyers.
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"Existing homeowners have a disincentive to sell because every dollar they borrow costs more," Mark Fleming, chief economist at First American Financial Corporation, told Yahoo Money. "The financially rational decision is not to sell."
This week, the mortgage rate for the 30-year fixed-rate mortgage hit 4.72%, the highest since December 2018, according to Freddie Mac.
A year ago, that rate was 3.13%. It hit an all-time low of 2.65% in January last year. During that time, millions of homeowners jumped at the chance to snag a historically low interest rate.
Now only 14% of homeowners with a mortgage have an interest rate of 4.75% or higher -- roughly where Freddie's Mac measure is now. They're also the only pool of homeowners who could sell their home now and buy another one at a similar price to theirs -- if all the transactions happen before rates rise again, a questionable feat considering rates have risen the fastest three-month clip since May 1994, per Freddie Mac.
Otherwise, the remaining 86% of homeowners are stuck with a mortgage rate of 4.625% or lower.
"There is a major drag on moving and replacing their current mortgagee, which is likely to have a lower fixed rate, which is lowering housing turnover," according to a statement from BofA Global Research.
86% of homeowners are stuck with a mortgage rate of 4.625% or lower. (Image credit: Black Knight)
How big is the deterrent?
Take a homeowner with a $100,000 mortgage at 3%. This homeowner makes $3,000 a year in interest payments on a 30-year fixed-rate mortgage, Fleming said. If the same homeowner sold their existing home and bought another home for $100,000 at 4%, the homeowner would pay $4,500 per year -- that's $1,500 more, or $125 more per month.
"So why put my house on the market to sell and become an immediate buyer when it costs more per month?" said Fleming.
And that's what happens - would-be sellers don't sell.
According to the National Association of Realtors (NAR), the housing stock for existing homes totaled 870,000 units at the end of February, down 15.5% from a year earlier when there were 1.03 million units. Existing properties account for 90% of all property sales.
The result?
"I think there's no question that the low inventory of homes for sale is driving prices higher -- probably the main reason," David Berson, chief economist and senior vice president at Nationwide Mutual, told Yahoo Money.
A house for sale is seen in Washington D.C., the United States, on December 12, 2021. Annual growth in US home prices remained strong at 18 percent in October, the highest in the index's 45-year history, according to CoreLogic's Home Price Index. (Photo by Ting Shen/Xinhua via Getty Images)
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The S&P CoreLogic Case-Shiller National Home Price Index was up 19.2% for the year in January, up from 18.9% in December.
"While the renewed acceleration in home price gains may be worrying and likely discouraging for first-time buyers and younger buyers, it is not surprising given the dismal inventory of homes for sale, which continues to decline and keeps making new lows." Selma Hepp, deputy chief economist at CoreLogic, said in a statement.
The story goes on

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