Existing homeowners still trapped by their 3% mortgages
Dilemma . . . Do I make a jump to a mortgage at 6 to 7% just to have a bigger house? There is more to this than just interest rates. Building supplies as NDd mention have been an issue. If they are decreasing in cost, builders can lower prices to help sell new houses.
Existing homeowners are still trapped by their 3% mortgages
– by New Deal democrat
Higher interest rates have created a bifurcation in the housing market. While builders can build smaller models and lower prices, existing homeowners can’t do the former and generally won’t to the latter.
As a result, homebuilders have been able to take advantage of the declining in commodity prices (like for lumber) to maintain volume at lower prices. Meanwhile existing home sellers have been unable or unwilling to sell their homes mortgaged at 3% in order to buy a home which will be mortgaged at 6% or 7%.
That pattern continued in July, as existing home sales declined to a 5 month low of 4.07 million on an annualized basis (the past 2 years of data are shown below):
Meanwhile the median price for an existing home is still up 1.6% YoY.
For all intents and purposes, many homeowners are trapped in their existing homes by the all-time low mortgage rates they were able to lock in early in the pandemic.
Tomorrow we will see if the more economically important new home sales continue their recent rebound, or whether the increase in mortgage rates back above 7%, and perhaps the waning of commodity deflation does some further damage.
Why would you jump?
Your monthly nut is going to more than double.
If you think that inflation is close to under control now and expect the Fed to head back down, you envision refinancing. Pay today’s price and get low financing 18 months later. Lots of folks made somewhat similar bets in the ‘00s where increased price-driven equity would qualify them for lower interest rates…..the nut was affordable on some kind of teaser rate and then would be affordable as they would later qualify for better normal mortgage rates. One contributing factor to it blowing up was that it really did work for several years. Those that jumped at it early enough did okay.
I did that in the mid 1980’s.
I used an ARM, and kept paying the same when it reduced interest charged.
The Volcker fed had as different environment than Powell’s.
Chance!
Many of those houses with 3 something mortgages are already big houses. At least as measured in SF. I am not sure that families will need bigger homes the way they did when the starter homes were <1000SF with two bedrooms. They may have reasons to move, but more space probably won’t be one of them.
I worked with any number of people who took on outrageous interest rates because they had another child, or the kids could no longer share a room. That should not be necessary with 2 bedroom homes almost extinct.
I know that nerves are getting tighter in real estate circles in my Wisconsin city as there are a whole lot of single family small houses with only elderly residents that really struggle to find buyers when they come up. The mid-sized duplex (~1800 SF) seems a much more popular option. Those old code (check for much shallower roof pitch than current construction) 1200 are tough sells. Even if the house could work, the lack of neighborhood kids turns families off. I have friends who just moved to Colorado Springs. They were surprised at the number of neighborhoods where so many houses had families with kids.
As a younger person building a career and a family, I too got emotionally tied up in upgrading my house as my income went up regardless of interest rates. While it was a blast for a while, looking back on it I should have just stayed in our original home and saved a ton of dough and stress by being satisfied with our first home. Every person I know that has a paid off mortgage at my age did not move, they stayed put and paid the thing off. Take my advice, don’t get caught up in vanity houses, it catches up to you.
Every person I know that has a paid off mortgage at my age did not move, they stayed put and paid the thing off….
[ Important. ]
woolley:
Hi!
I am happy to see you once again. It has been a while. Our home of 27 years was a gold mine for us. We used it to get caught up. Finally sold and left well compensated. We were at breakeven in 2008 as housing values dropped (as you know). We remortgaged with a seven-year Arm at 3.75%. When that ended, it dropped to 3.25% for one year. We sold, got our price plus some. When I retired and collected SS, my wife collected off of it and we banked it. Moved before the one year was up.
In AZ now. Smaller home at 1500 square feet with an assumable 2.65% 30-year VA mortgage. Hugely energy efficient and beats the heat. Sale of home funds, plus IRAs, earlier saved SS off my SS by my wife, and maxed out SS gives us more than adequate living funds.
Rough going along the way till the last decade when my salary leaped. Sometimes things work out in the strangest of ways.
“Meanwhile existing home sellers have been unable or unwilling to sell their homes mortgaged at 3% in order to buy a home which will be mortgaged at 6% or 7%.”
If yer ‘underwater’ with a 2%-3% mortgage, you probably feel like you can’t afford to upgrade to a newer, even if larger house with a 6%-7% mortgage. So sad…
Mrs Fred & I bought a house in ’78 & had a 6-7% mortage, which we were able to pay off very early, due to a severance package (mine), but only because we hadn’t spent that much on the house (new) when we bought it, in effect. That was back before real-estate prices went nuts. Houses in our neighborhood, many of which are much larger than ours (but not all) are now selling for twenty times what we paid. (But this is New England, alas.)
House purchasing should be done using the Greater Fool Theory, or not at all, it seems.
We won’t sell our house any time soon, because we aren’t willing to spend $1.2 million or so to replace it. Even if we were to get 10x what we paid for our current home of 45 years.
Looks like we totally missed out on the 2%-3% rates.
Fred:
What you are saying makes perfect sense and appears to fit your needs.
I picked 80 pounds of pears from one of my early pear trees two weeks ago and that was probably less than one quarter of this years produce. I can’t imagine wanting to keep doing that for the next 10 years, so moving again seems certain. Fortunately, I do not have to think of moving in the current market.