There’s a specter haunting the housing market: the ghost of last year’s mortgage rates. The average 30-year fixed mortgage rate hit 7.10% on Thursday, the highest reading since November of last year. Higher mortgage rates triggered a drop in demand. Meanwhile homeowners who’ve locked in lower mortgage rates are choosing not to sell, tightening available inventory. That means that the market is losing buyers looking to move up and losing sellers looking to move up, so this lock-in effect is constraining both sides of the market.
“Record-low homeowner vacancy rates have essentially depleted housing inventory and materially tightened supply,” Goldman Sachs analysts wrote in a research note last week. “On net, this implies a muted impact from [new build] completions on the current supply/demand balance of housing and, ultimately, prices.”
Even if every single-family home under construction was completed and listed on the market immediately afterward, Goldman Sachs added, that month’s supply of homes would still be below historic averages, despite the current pipeline of new homes under construction being historically large.
With rates moving closer to their peak of 7.37%, homeowners that locked in lower rates during the Pandemic Housing Boom (or earlier, as rates had been low for years), are choosing not to sell and retain their low rates, often of 3% or less. According to Goldman Sachs, 99% of borrowers have a mortgage rate lower than 6% or the current market rate, and around 28% of those have rates below 3%.
Think about it like this, if you took on a $600,000 mortgage and your rate is 7%, your monthly principal and interest payment would be $3,992. But with the same size loan and a rate of 3%, your monthly payment is slightly over $2,530 a month.
Finance and economics professor at the University of South Alabama, Bob Wood, told Fortune that he locked in a fixed 15-year mortgage rate of around 3% when he purchased his home in Mobile, Alabama, in 2014.
“The way that the rates are up so much right now, it just doesn’t make sense [to sell],” Wood said.
Wood and his wife were looking to downsize, and after pricing it out a few times, they were happy with the numbers they were seeing. But now that rates have gone up, if they sell, they’ll have to pay almost double for a smaller home. Wood said they’re “just not willing to do that,” so they’re planning on holding off and waiting for rates to moderate.
“We’ve got time to do this, and it’s not critical,” Wood told Fortune. “So we just think that we’ll ride it out, and hopefully in the next 12 to 18 months, the market will move down.” As Goldman writes, they are far from alone.
In January, existing home sales fell by 0.7%, for the twelfth straight decline, with all regions experiencing a year-over-year decline, according to the National Association of Realtors. Additionally, the number of new listings fell 18.7% in January compared to the same time the previous year, according to Redfin.
So it seems that inventory will stay tight and we might see greater declines, as the 99% of borrowers that have rates below the current market rate hold on to their old rates.
Retail district manager, Cory Kinman, refinanced his home in Riverside, California in August 2021 with a rate around 2.42% after purchasing it in 2016 at around 3.68%. Kinman told Fortune he saves around $500 on his monthly payments after refinancing. But he’s actually splitting his time between California and Portland, Oregon, after getting a new job. Instead of losing his low rate that he’s locked in and selling his home, he’s renting an apartment in Portland and traveling between the two states for work—which he says is cheaper because of how reasonable his mortgage payments are.
“I can’t afford to sell because I don’t want to lose that rate,” Kinman told Fortune. “If I ever want to move back to California, it’s going to be impossible because I’ll never get a rate lower [than that]. So I am scared as hell to let go of the house at that rate, and I also can’t afford to buy in Portland because the pricing and the rates are too high.”
If rates weren’t so high, Kinman said, he’d sell the home and purchase in Portland. Kinman's hoping to eventually purchase a second property in Portland, so that he won’t have to give up his low rate—if he doesn’t find a job back in California right away.
While Goldman Sachs expects the so-called lock-in effect to constrain the U.S. housing market, the investment bank doesn't think it'll be enough to stop the home price correction. Heading forward, Goldman Sachs expects national house prices will fall 6.1% in 2023.
