High mortgage rates keep people in their houses, limiting supply

When Colleen Randall bought her house in 2016 for $174,000, she figured it would be the perfect starter home. Then the last few years have made the deal even better: She doubled square meters after remodeling her unfinished basement. Now the three-bedroom, three-bath house in Hagerstown, Md., is worth a minimum of $260,000. Refinancing in 2020 also lowered her mortgage rate from 3.25 to 2.75 percent and turned off her private mortgage insurance.

And that’s the problem.

Randall, 33, and her husband want a second child, but their third bedroom is a sunroom and won’t work for a second baby. They usually just wanted to Looking to move and sell to anyone else looking for a first home. But they can’t imagine giving up their ultra-low rate for a new one mortgage over 6 percent on a larger house. The more likely scenario: put off having another child and stay there.

“My mortgage payment would essentially double if we bought a house with about the same square footage, with just a better layout,” Randall said. “I just can’t do it. If I could predict the future, we’re probably going to stay where we are. It’s simply too comfortable a position.”

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People like the Randalls are everywhere, and they are creating unexpected problems for the housing market. Home values ​​rose in recent years as the pandemic changed people’s housing needs and buyers clamored for the few listings available. To cool demand—and tame inflation throughout the economy—the Federal Reserve has raised interest rates at the fastest pace in decades. Those moves sent mortgage rates up over 7 percent last fall, and while they’ve pulled back somewhat, the 30-year fixed rate is still around 6.35 percent, according to Freddie Mac.

But there are also those increases discourage owners from putting their homes on the market and losing low interest rates they borrowed money for before last year. And it is to cut down on the supply of houses, especially for conventional starter homes that have long helped first-time buyers gain a foothold in the market.

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

“The world is getting back to normal, but we still have the aftermath of what happened,” said Skylar Olsen, chief economist at Zillow. “It makes the housing market behave this way.”

Finding a balance between supply and demand in the housing market is the key to getting inflation under control. But experts don’t say things will get better until prices boil down, which probably won’t happen until next year. Even then, the days of super-low 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 prices below today’s average. By the end of 2022, 62 percent of mortgage owners had an interest rate below 4 percent, and 82 percent had an interest rate below 5 percent, according to Redfin data. A full 92 per cent had a rate below 6 per cent.

The number of new listings hitting the market is also well below normal levels as millions of homeowners decide 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 fall is more dramatic in some areas. Listings in Winston, NC, were down 65.6 percent in February, compared to a year earlier, according to Zillow. In Milwaukee, 49.6 percent. The listings in Las Vegas fell 39 percent, and in DC 36.8 percent.

The drop in listings is unusual, even compared to pre-pandemic levels. In this way, listings in Winston fell by 67.3 per cent, and in Las Vegas by 45.9 per cent.

In normal times, Knoxville, Tenn., will have about 10,000 active listings at any given time. But when Hancen Sale bought his first home in late 2020 and early 2021, it was only 1,300 properties were 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.

Sale works for the Knoxville Area Association of Realtors and has seen how the pandemic turbocharged the college town’s housing market. In 2021, the annual income needed to afford the average 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 the age of 25, he can’t imagine giving up his situation, and if he ever outgrew the house, he would rent it out.

“It’s going to be difficult for me, financially, to move elsewhere,” Sale said. “It kind of froze me in place in a lot of ways. And even if I did move, it would probably be to hold on to a house like this because the price is so low that it would be a good income-generating investment for me.”

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Meanwhile, many people are clamoring to find affordable housing, even if it means 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 lives. The long-distance couple has been looking for a home in northern Connecticut for around $325,000. They have lost on six offers.

Last month they were getting ready to deploy their seventh. But while on the phone with their real estate agent, they were told that someone else had just made a massive bid. The only way for Engel and Young to get back to the front of the line would be to put down an extra $100,000 – cash.

“There’s an overwhelming sense of hopelessness — that’s the word — that washes over 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. Am I not old enough to own a house? You feel like a child.”

Engel said she sees no sign of demand in New England cooling. But the housing market is extremely sensitive to changes in interest rates, and there are some indications that the Fed’s moves are working as central bank governors intended. The median price for existing homes fell 0.9 percent in March from a year earlier, to $375,700, according to the National Association of Realtors. It marked the biggest year-on-year price decline since January 2012.

It takes longer to sell homes that come on the market, which helps to increase inventory and tame the buying frenzy from earlier phases of the pandemic. Fed officials are betting that the slowdown will eventually trickle down to the rental market, a crucial step since the cost of rent has become the main driver of inflation throughout the economy.

“We don’t see that yet in housing services,” Fed Chair Jerome H. Powell said in February. – But we expect to see it. We need that to happen. It’s another big part of the economy. It must come. It should come in the second half of this year.”

But prices will probably not fall significantly until there are simply more homes available. Experts have different estimates for how many more houses the country needs, with figures sometimes varying from 1.5 million to 5 million. Last year, the White House unveiled its action plan for housing supply, which aims to help close the country’s housing shortage in five years.

Ongoing supply chain problems, labor shortages and rising construction costs have few experts hopeful that the plan can come to fruition. But at least the trend is going in the right direction; the number of listings coming from new construction has been steadily rising 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, this figure had grown to more than 33 percent.

Still, there is a long way to go, especially when it comes to luring people with ultra-low prices.

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

Levitt keeps an eye on Zillow listings, and sees other, less appealing homes in his neighborhood selling for $200,000 more than he paid. He has spent money on upgrading the house — with solar panels, a sauna and exercise equipment. He can rent it out down the line. But he can’t imagine selling, or going back to his old Boston apartment without a patio or parking.

“I’m losing money in that scenario,” Levitt said, “versus making a profit.”

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