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Mortgage rates of 3% will cover the US housing market for years to come


There’s a specter haunting the housing market: the specter of mortgage interest rates last year. Medium 30 year fixed mortgage interest rate reached 7.10% on Thursday, the highest reading since last November. Higher mortgage rates have caused a drop in demand. Meanwhile, homeowners who have locked in lower mortgage rates are choosing not to sell, tightening available inventory. That means the market is losing buyers who want to increase prices and losing sellers who want to increase prices, so this lock effect To be restrict both sides of the market.

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“The record low vacancy rate has essentially drained the housing supply and the supply is physically tight,” he said. Goldman book The analysts wrote in a research note last week. “On the net, this means the impact is muted from [new build] perfecting the current supply/demand balance for housing and ultimately prices.”

Goldman Sachs added that even if every single-family home under construction were completed and listed on the market shortly thereafter, home supply for that month would still be below the historical average. , regardless of the current situation. pipeline of new houses under construction historically large.

With rates approaching a peak of 7.37%, homeowners have locked in lower interest rates during the Pandemic Housing Boom (or earlier, as rates have been low for many years). year), is choosing not to sell and keeping the rate low, usually 3%. or less. According to Goldman Sachs, 99% of borrowers have mortgage rates lower than 6% or current market ratesand about 28% of them have interest rates below 3%.

Think of it like this, if you took out a $600,000 mortgage and your interest rate was 7%, your monthly principal and interest payments would be $3,992. But with a loan of the same size and 3% rate, your monthly payment is more than $2,530 a month.

Professor of finance and economics at the University of South Alabama, Bob Wood, says Luck that he took a fixed 15-year mortgage rate of about 3% when he bought his home in Mobile, Alabama, in 2014.

“The way the exchange rate has gone up so much right now, it makes no sense [to sell]’ said Wood.

Wood and his wife were looking to downsize, and after pricing a few times, they were pleased with the numbers they saw. But now that rates have gone up, if they sell, they’ll have to pay almost twice as much for a smaller home. Wood said they are “just not willing to do that,” so they are planning to delay and wait for rates to drop.

“We have time to do this and it doesn’t matter,” Wood said. Luck. “So we just think we’re going to get through it and hopefully over the next 12 to 18 months the market will go down.” As Goldman writes, they are not alone.

In January, existing home sales fell 0.7%, the 12th consecutive decline, with all regions falling year over year, based on National Association of Realtors. Additionally, the number of new listings fell by 18.7% in January compared with the same period a year earlier, based on red fin.

So it looks like inventory will continue to be scarce and we could see a bigger drop, as 99% of borrowers with interest rates below current market rates will keep their old rates the same. .

Retail manager, Cory Kinman, refinanced his home in Riverside, California in August 2021 at a rate of about 2.42% after buying it in 2016 at a rate of about 3.68%. . Kinman told Luck he saved about $500 on his monthly payments after refinancing. But he’s actually splitting his time between California and Portland, Oregon, after getting a new job. Instead of losing the low interest rates he’s locked in and selling his house, he’s renting an apartment in Portland and commuting between the two states to work — which he says is cheaper because of the payments. How reasonable is his mortgage?

“I can’t afford to sell because I don’t want to lose that rate,” Kinman said Luck. “If I want to go back to California, it’s impossible because I will never get a lower price [than that]. So I’m scared to sell the house at that price, and I can’t afford it in Portland because the prices and rates are so high.”

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

While Goldman Sachs expects the so-called lock-in effect to constrain the US housing market, the investment bank doesn’t think it will be enough to prevent a home price correction. Going forward, Goldman Sachs predicts a 6.1 percent drop in home prices nationally by 2023.

This story was originally featured on Fortune.com

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