Game of Homes

Game of Homes

July 24, 2023

This past weekend I read an interesting article that discussed the negative impact that low rate mortgages were having on home sales here in the country. These rates in essence are preventing sellers from making a move, because who would want to unload a 3% mortgage, to pay upwards of 7% for a home that will most certainly be more expensive, potentially smaller, and likely much older than the home they'd be selling. With fewer sellers in a position to sell, buyers are left with fewer and fewer options. The statistic that really stood out to me was from a study that Redfin, a real estate brokerage and analytics company, put out on 6/14/2023 which stated that 92% of homeowners with mortgages have rates below 6%. Furthermore it stated that roughly 83% of homeowners have rates below 5%, 62% had rates below 4%, and a little less than 25% had mortgages with rates below 3%. That leaves approximately 8% of homeowners who are potentially free to buy or refinance.

Until recently realtors were quick to point out that if a home was a bit out of a buyer's price range, that they should still buy it, because refinancing down the road when rates inevitably dropped was always a viable option. This possibility no longer appears to be likely or true.  As of 7/21/23 the average 30 year mortgage rate was hovering at 7.2%, which is well above the 33 year historical average of 6.02% in the United States. For the few new or existing homeowners who have rates above 6% and below the current 7% range, refinancing still looks like a solid and prudent financial move. For the rest of the lot, making a move or purchasing a home will look a lot different than it historically ever has and will be a much more complicated decision making process.

One unfortunate byproduct of this predicament could be that homeownership rates continue to drop, and the percentage of new homeowners entering the market place continues to diminish. For buyers that do decide to enter the real estate market they will have to be liquid and have much more cash on hand than the typical buyer would have needed a few years ago. For buyers with deep enough pockets the assumable loan feature for government sponsored loans, like FHA and VA loans, may become increasingly popular. With this little known feature, buyers will be able to assume the mortgage and its low interest rate from the seller. The caveat being that they will need to have the cash on hand to pay the difference between what the home was sold for, and what the balance of the outstanding mortgage was at the time of the transaction which could be a considerable. Homes with assumable loans should command a higher selling price as a byproduct of this feature.

Another outcome that appears to be taking shape is that the normal ebb and flow or turnover in the real estate marketplace slows and that the market overall becomes top heavy where existing homeowners own multiple properties and are very wealthy. While the remainder of renters/would be buyers are locked out of the market due to poor affordability or lack of proper inventory. The irony may ultimately end up being that because of the Government's easy monetary policy in order to boost growth to combat the previous housing crisis, they may have indirectly encouraged existing homeowners to engage in "home hoarding" where they never sell their low rate homes again, which causes a different sort of housing crisis now where lack of supply is the bottleneck.

With so much of an individual's wealth tied to their home equity, this will exacerbate the divide between the haves and the have nots, where the determining factor for success for the next 30 years may not be what you did for a living or whether you were a prudent saver, but whether you were one of the lucky ones who purchased or refinanced their home during the lowest mortgage rate period in history. Like a game of musical chairs where the loser is left seatless, many future homeowners may find themselves locked out of creating any substantial wealth all because of bad luck and poor timing.