99% of borrowers have a mortgage rate below 6%

A specter haunts 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 last year. Rising mortgage rates led to lower demand. Meanwhile, homeowners who have locked in lower mortgage rates are choosing not to sell, reducing available inventory. This means the market is losing buyers looking to go up and losing sellers looking to go up, so this blocking effect East constraining both sides of the market.

“Record owner vacancy rates have essentially depleted housing inventory and significantly tightened supply,” Goldman Sachs the analysts wrote in a research note last week. “On the net, it involves a muted impact of [new build] on the current balance between supply and demand for housing and, ultimately, on prices. »

Even if every single-family home under construction were completed and put on the market immediately thereafter, Goldman Sachs added, this month’s home supply would still be below historical averages, despite the current situation. pipeline of new homes under construction being historically large.

As rates edge closer to their peak of 7.37%, homeowners who locked in lower rates during the pandemic housing boom (or earlier, as rates had been low for years), are choosing not to sell and to keep their rates low, often 3%. or less. According to Goldman Sachs, 99% of borrowers have a mortgage rate below 6% or the current market rateand about 28% of them have rates below 3%.

Think of it like this, if you took out 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 an interest rate of 3%, your monthly payment is slightly higher at $2,530 per month.

Bob Wood, professor of finance and economics at the University of South Alabama, said Fortune that he locked in a 15-year fixed mortgage rate of around 3% when he bought his house in Mobile, Alabama in 2014.

“The way rates are so high right now, it just doesn’t make sense [to sell]“said Bois.

Wood and his wife were looking to downsize, and after evaluating it 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 house. Wood said they “just aren’t willing to do that,” so they plan to be patient and wait for rates to moderate.

“We have time to do it, and it’s not critical,” Wood said. Fortune. “So we just think we’re going to get through this and hopefully in the next 12 to 18 months the market will go down.” As Goldman writes, they are far from alone.

In January, sales of existing homes fell 0.7%, the twelfth consecutive decline, with all regions experiencing a year-over-year decline, according the National Association of Realtors. Additionally, the number of new listings fell 18.7% in January compared to the same period a year earlier, according Redfin.

So it looks like inventories will remain tight and we could see bigger declines as the 99% of borrowers who have rates below the current market rate keep their old rates.

Retail District Manager Cory Kinman refinanced his Riverside, Calif. home in August 2021 at around 2.42% after buying it in 2016 at around 3.68%. Kinman said Fortune he saves about $500 on his monthly payments after refinancing. But he actually divides his time between California and Portland, Oregon, after finding a new job. Instead of losing his low rate he’s locked in and selling his house, he rents an apartment in Portland and travels interstate for work, which he says is cheaper due to his reasonable amount of mortgage payments.

“I can’t afford to sell because I don’t want to lose that rate,” Kinman said. Fortune. “If I ever want to go back to California, it’s going to be impossible because I’ll never get a lower rate [than that]. So I’m very scared to let go of the house at this rate, and I also can’t afford to buy in Portland because the prices and rates are too high.

If rates weren’t so high, Kinman said, he would sell the house and buy it in Portland. Kinman hopes to eventually buy a second property in Portland, so he won’t have to give up his low rate if he doesn’t immediately find a job in California.

While Goldman Sachs expects the so-called foreclosure effect to limit the U.S. housing market, the investment bank doesn’t believe it will be enough to halt the house price correction. Looking ahead, Goldman Sachs expects domestic house prices to fall 6.1% in 2023.

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