The Housing Market Epidemic: Rate Lock Syndrome

housing-marketIt is undeniable that interest rates are a huge driver of the housing market.  When looking for a home, one of the first questions a prospective homebuyer asks is: “what are the current interest rates?”  Whether this is effective way to shop or not, interest rates due ultimately influence decisions.  As interest rates have remained at a 30-year low for some time now, it seems that interest rates carry a lot more weight than they did before.  Lower interest rates allow for homebuyers to qualify for larger homes, as it accounts for a smaller portion of the monthly mortgage payment in comparison to that of a higher interest rate.

With the help of historically low rates, homeowners have been able to move into much bigger houses.  Low interest rates equal more houses to afford, much to the delight of homeowners who purchased in the recent years. According to Forbes, 30-year interest rates were over 18 percent in 1981, hitting unbelievable lows at 3.3 percent in late 2012, and now climbing into the mid-four percent range.  As Forbes describes it, “nobody expects rates in the teens again, but rates in the 5 percent and 6 percent range are no longer out of sight.” The housing market is now at a point where so many homeowners have taken advantage of low rates that they are experiencing what Forbes playfully calls, Rate Lock Syndrome.    Rate Lock Syndrome is experienced when homeowners are caught in the most ideal housing situation for them at that time.  They are “locked” in to their housing situation because, unless they don’t mind downsizing for a similar to higher price than they would with the lower rate that they currently have, they won’t be able to move into a larger home.   When interest rates were in the 3 percent range, many homeowners chose a larger home because their interest rate was smaller, thus making their mortgage payments substantially more affordable.  Those who chose a smaller house and monthly payment lesser than they could afford were able to save a significant amount of money.  At this point, these borrowers are not going anywhere, and as rates rise, they are staying in their homes for the long haul.

Continuously rising rates mean that would-be homebuyers are more discouraged or even disqualified from homeownership.  So many refinanced during the time of low interest rates as they knew that the low interest rates would not last forever, and as a result, “millions of current homeowners are now locked in at mortgage rates close to or at historic lows.  The refi boom came and went.  Many are staying put, for fear of having to move into a smaller house due to rising interest rates.

Forbes states, “the Mortgage Bankers Association is currently predicting that rates on a 30-year, fixed rate mortgage will rise to 5.1% by mid-2015.  If that happens, then mortgage rate lock will become a pronounced headwind for the housing market, reducing home sales by about 4 percent from current levels even after accounting for positive factors like modestly higher incomes and more households”.  In order to combat this, many financial experts agree that income levels must increase, which seems unlikely at this moment.  Overall, mortgage interest rates are not expected to get as low as they were in 2012 once again.  If people want to become homebuyers, they will have to bite the bullet and accept the rising interest rates.  The low interest rate party is officially over.

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