Many American homeowners took advantage of the low mortgage interest rates of 2013 in some form or another whether that be through buying a home or refinancing. Now that mortgage interest rates are slightly above what they were last year, the combination of rising home prices and slightly higher interest rates together are hindering home sales nationwide. Buyers simply are feeling less urgency to buy a home as affordability becomes a growing issue. Despite interest rates still at historic lows, homebuyers aren’t budging. Mortgage News Daily reports, “home prices are nearly 12 percent higher than a year ago which presents affordability challenges to home buyers”. Vice President of the California Association of Realtors and Chief Economist Leslies Appleton-Young stated, “though housing inventory is up from last year, it’s still half of what is considered normal, with some of it being overpriced. A tempering in home price increases and the recent drop in mortgage rates, however, should help spark the market in the upcoming months”.
CBS News described this as a once in a lifetime problem among current homeowners: “would-be home sellers across the country are grappling with a once in a lifetime problem: they have mortgage rates so absurdly low it would hurt them financially to sell”. The logic in that is that typically when mortgage interest rates are lower than the rate that homeowners currently have, they act on the opportunity to trade up to a better home with a better interest rate. At this point, many homeowners already have unbeatably low interest rates, thus making the idea of selling their home with an incredibly low interest rate for one with a higher interest rate very unattractive and also creating a unique phenomenon in the Real Estate world. CBS News calls this the “rate lock in”, which some wouldn’t even entertain the idea of moving for a new job because of.
Real Estate data firm, CoreLogic estimates that more than one-third of homes with a mortgage now have rates below 4%.. Chief Economist at CoreLogic, Mark Fleming, estimates that “as many as 3.6 million homeowners are unlikely to sell this year because they would have to give up a lower rate…they got the deal of the century at 3.5%”. This year, mortgage interest rates overall have been higher than they were last year, and homeowners are ignoring the fact that they are still historically low. If mortgage rates rise later this year after the Fed cuts back its Quantitative Easing program, more homeowners will be affected. As a result of all of this, homeowners are content staying exactly where they are.
Even the homeowners who are not staying put are not selling. These homeowners are buying new, upgraded homes, but keeping their old homes and renting them out. These new Real Estate trends are keeping a significant amount of homes off of the market. Whether homeowners are staying in their current homes, or buying new homes and renting their former homes, this means that the lack of homes for sale is significantly driving up the home prices for those that are for sale. CBS News reports, “a shortage of homes for sale has plagued the housing market since late 2012. The number of available homes last year was the equivalent of just 4.9 months worth of sales, according to the National Association of Realtors. That’s far before the typical figure of 6 months”.
There is a chance that higher home prices can lead to more people selling their homes. The more that home prices rise, the more likely underwater homeowners are to come ‘above water’ on their mortgages, and then they may be able to sell and buy a new home. Lending standards have continued to remain tight, but a recent increase of mortgage applications (potentially due to declining interest rates), may be an indication of higher housing demand for the remainder of the year.