Holding Low-Interest Loans, Many Homeowners Are Too Comfortable to Move

No, Thanks; We’re Good!

Home sellers are staying away from the market in droves this year. Millions fewer new listings hit the spring market. Zillow reports that the February 2023 volume of listings is down 23% year over year.

The missing sellers are sending a message to the market. Look how comfortable we are with our current mortgages!

Most would prefer not to sacrifice this comfort to buy another home with a less comfortable loan. Trading up to one of today’s mortgages could easily add hundreds, even $1,000 or more to their monthly mortgage payments.

In case you were wondering, that’s where most homeowners are this season.  

Show Me the Numbers!

But how many people really have cheap mortgages? You might be surprised. The Washington Post published Redfin and Zillow stats as the 2023 real estate market was about to start. Here’s what Redfin says today’s mortgage holder have:

  • 60%+ of current homeowners have mortgage loans with interest rates below 4%.
  • 80%+ of homeowners have mortgages with rates under 5%.
  • 90%+ of homeowners have mortgages with rates under 6%.

Wow, looks like just about everyone who owns a home is sitting pretty after financing or refinancing in the 2020-2021 scramble, and now almost everyone wants to hang onto what they earned for their effort. It’s understandable. No one wants to set themselves back financially if they don’t have to.

If they can work from home, they might be able to avoid moving. In any case, these borrowers might find it makes better financial sense to renovate or build an addition to their current home than to sell it and lose their low interest rate. The downside to making renovations now is part and parcel of the entire problem: getting a loan to finance home upgrades means paying today’s high loan interest rates.

As If Homes Weren’t Hard Enough to Find Already…

We can’t blame the market’s missing sellers. People who are staying in place rather than putting their homes up for sale are not trying to make life hard for hopeful buyers. It’s just that they’d lose money if they traded up to a pricier mortgage.

Some of these owners managed to refinance in 2020, and snagged a rare opportunity to reduce the interest on their loans to about 3% or even lower.

Now, a few years have passed. Maybe they’d like to sell up. But they can’t imagine giving up their mortgage for a new loan that more than doubles the rate. Per Freddie Mac, the interest on a 30-year, fixed-rate mortgage about 6.6% as we head into June 2023.

If the interest rates go down in the months ahead, we might see some of these owners listing their homes. Then again, they could very well decide to move without selling their current homes.

That’s right: Some owners won’t want to let those low-rate mortgages go — even if they do decide to move. With monthly rates so low, they just might hold onto their current homes and rent them out.

And Now, Corporate Buyers Are Betting on Persistent Renting.

Speaking of renting, corporate real estate companies are buying up homes to flip them into the rental market. Their profits depend on renters and prospective renters, and how much they will pay in a given community. As institutional investors buy homes, they tend to push the cost of housing upward. All the while, they leave fewer homes on the market for ordinary buyers.

Legislating the corporate landlords out of town: See how Nevada might give it a try.

Policy analysts say the housing market’s huge imbalances have to be ironed out. Otherwise, taming inflation will be impossible. They say things will start to balance out if and when interest rates drop. “Maybe next year…” goes the refrain.

We have seen interest rates go back down a little bit lately. But here’s the rub. We don’t necessarily see a surge in available housing. The federal government thinks part of the reason is the way institutional buyers can elbow ordinary home buyers out of opportunities.

The Government Says: We’re Trying to Level the Playing Field.

U.S. Housing and Urban Development secretary Marcia Fudge sees corporate buyers “reshaping local housing markets and making it more difficult for first-time homebuyers” to buy houses, condos, or manufactured homes in big metro areas like Phoenix, Atlanta, Charlotte, and Milwaukee.

The Biden administration is seeking ways to level the playing field. The Housing Supply Action Plan, unveiled by the White House last year, sets forth a goal of creating more affordable housing. It also calls for primary residence owners to receive certain advantages over institutional investors.   

Federal policy makers continue to brainstorm on how to dilute the influence of corporate buyers. Here are some ideas being discussed:

  • Buy out institutional owners. (Cincinnati identified properties with corporate owners, and purchased multiple home properties from them.)  
  • Pass local laws requiring sellers to offer non-corporate buyers first dibs on their listings.
  • Pass local laws to provide renters with opportunities to buy their homes (individually or by establishing co-ops).
  • Help residents in mobile home parks purchase the land beneath them. Residents can benefit from grants and loans to purchase these parcels.
  • Relax zoning to welcome manufactured home communities. Offer federal incentives to local governments to make it happen.
  • Generate home rehab loans with easier terms for ordinary buyers of fixer-uppers. (Today, it’s much easier for a company to finance building upgrades than for ordinary buyers to get rehab financing.)

Institutional investors have proven influential in real estate markets across the country. To shift some of that power to buyers, cities could create alliances with builders, focusing on supplying more primary residences for buyers. Cities can handle the public information needs of these collaborations.

Thinking of buying a fixer-upper? You’ll want the right kind of financing to reach your goals. Consider some of the most popular home renovation loan options.

Meanwhile, What About Sellers Who Want to Move Today?

It’s great that people who have super low rate mortgages. But if they’d like to move, they have a dilemma. Why take on a new mortgage with a higher rate (on top of the price of the home, the closing costs, moving expenses and so on)?

Absolutely have to move? Then it’s time to bite the bullet. Perhaps it’ll be possible to refinance in the future — if rates come down. No one can be sure they will.

There’s a silver lining for a few fortunate buyers. Some will encounter sellers who hold assumable mortgages (FHA loans, for example). And some will be able to assume those sellers’ loans. Check out our piece on that: Interest Rates on the Rise? Assumable Mortgages Never Looked Better.

Supporting References

Freddie Mac: Mortgage Rates Continue to Increase (May 25, 2023).

Rachel Siegel for The Washington Post:A Problem for the Housing Market – People Won’t Quit Their Cheap Mortgages (May 14, 2023).

Update – Institutional Investors in Housing from PD&R Edge via HUD User (a publication of the United States Department of Housing and Urban Development, Office of Policy Development and Research; Jan. 10, 2023).

And as linked.

Photo credits: Samson Katt and Sam Lion, via Pexels.