Downside of low U.S. mortgage rates? Less selling
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 last 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 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.
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," says 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?"
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 just 4.9 months' worth of sales, according to the National Association of Realtors. 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 last year. Yet prices rose 8.8 percent nationwide during the same period, according to CoreLogic, partly because of the limited supply.