WASHINGTON — Would-be home sellers are grappling with a once-in-a-lifetime problem: They have mortgage rates so absurdly low it would hurt them financially to sell.
Doing so would mean giving up an irresistible rate in exchange for a new mortgage carrying a rate up to a percentage point higher. Their monthly payments would be larger even for a house of the same price. That’s discouraging some people from selling, thereby limiting the supply of available homes and contributing to slower home sales.
It’s a significant shift from the way the U.S. housing market has worked for the past 30 years. For most of that time, whenever a homeowner decided to trade up to a better home, mortgage rates usually were lower than the last time they had bought. That helped make a new purchase seem more attractive.
But that is changing. The average rate on a 30-year mortgage fell below 4 percent in late 2011 and reached a record-low level of 3.3 percent in November 2012. It didn’t top 4 percent again until mid-2013. Homeowners took advantage of the lower rates, and a refinancing boom ensued.
More than one-third of homes with a mortgage now have rates below 4 percent, real-estate data provider CoreLogic estimates. Yet mortgage rates now average 4.2 percent. That is still low by historical standards but up about three-quarters of a point from a year and a half ago. And should mortgage rates rise this year and next, as many economists expect, even more homeowners will be affected.
As a result, many homeowners with low rates are staying put. Others are moving and buying new homes, but keeping their old ones and renting them. Both choices mean that fewer homes are listed for sale, which drives up prices. Higher prices and limited selection have put the brakes on a housing recovery that began in 2012.
And slower home sales, in turn, drag down economic growth. Fewer sales mean lower commissions for real-estate agents. Sales of furniture, appliances and garden supplies also take a hit.
Mark Fleming, chief economist at CoreLogic, estimates that as many as 3.6 million homeowners are unlikely to sell this year because they would have to give up a lower rate.
“They got the deal of the century,” said Glenn Kelman, CEO of the real-estate brokerage Redfin. “ I don’t think in
100 years anyone will be lending money at 3.5 percent. How do you walk away from a deal like that?”
You’d think Ryan Carson, a lawyer in Seattle, would be ready to sell. He and his wife have one young child, and they are expecting twins. They are going to hire a live-in nanny, which means there will be five people living in their four-bedroom house.
“I could probably use the extra space, honestly,” he said. And he would make money off the sale, as his home’s market value is above what he paid.
But Carson, 39, has a 30-year, 3.85 percent mortgage, so he isn’t going anywhere. He refinanced into the lower rate last summer, reducing his monthly payment to $2,200 from $2,600.
“I have no interest right now in selling,” he said. He and his wife plan to remodel instead.
A shortage of homes for sale has plagued the housing market since late 2012. The number of available homes last year was the equivalent of 4.9 months’ worth of sales, the National Association of Realtors said. That’s far below the typical figure of six months. Inventory has recovered somewhat this year, partly because the buying season is underway, but it was still equal to just 5.6 months of supply in May.
Meanwhile, sales of existing homes have fallen 5 percent in the past year. Yet prices rose 8.8 percent nationwide during the same period, according to CoreLogic, partly because of the limited supply.
What economists call “rate lock-in” is one of several reasons so few houses are for sale. Another factor is that almost 40 percent of homeowners still don’t have enough equity to enable them to sell. Some are “ underwater,” with a mortgage higher than the home’s value. Others might have so little equity that they can’t afford to pay off the sales costs and put a down payment on their next property.
“We are in a uniquely difficult period for matching buyers and sellers,” said Stan Humphries, chief economist for the real-estate data provider Zillow.
Home prices are expected to keep rising in the coming months, though at a slower pace than the double-digit gains that have occurred this year. Higher prices should lower the number of underwater homes and enable more people to sell.