Homeowners with Mortgages Rates Greater Than 5% More Likely To Sell
Homeowners with a mortgage interest rate of 5% or more are nearly twice as likely to sell than those with a lower rate, according to a new survey from Zillow.
While only one in five of those surveyed by Zillow fall in that category, it's a sharp contrast to nearly 80% of mortgage holders with a rate below 5% and nearly a third with rates under 3% who feel “locked in” by record-low pandemic rates.
Key Takeaways Homeowners with a mortgage interest rate of 5% or more are nearly twice as likely to sell than those with a lower rate.
Today’s higher rates have some homeowners feeling locked in to their current homes.
23% of homeowners plan to sell their homes in the next three years, up significantly from 15% a year ago.
Renting may be cheaper than mortgage payments in 45 of the 50 largest cities in the United States.
The U.S. Federal Reserve's campaign to fight inflation has pushed mortgage rates significantly higher. Homeowners who currently have lower rates would have to pay much more, possibly hundreds of dollars, if they consider selling and getting a new mortgage in the current market. That has resulted in 28% fewer new for-sale listings in June than a year ago as today’s homeowners bide their time. This shortage pushes home prices even higher as potential buyers compete for the existing low inventory.
Hope for Potential Buyers
The Zillow survey found that 23% of homeowners plan to sell their homes in the next three years, up significantly from 15% a year ago, so there is still hope for those hoping to purchase a new home.
Additionally, Zillow found that 45% of buyers are paying mortgage points upfront to reduce their interest rates on a loan. A number of buyers are also compromising on their wish lists and competing for smaller, more affordable homes.
"We expect mortgage rates may notch down slightly as inflation comes under control, but they are unlikely to return to 5% in the near future," said Orphe Divounguy, a senior economist at Zillow Home Loans. "That means many homeowners will move only for major life events, like a new baby or retirement. Over time, homeowners will likely accept higher rates as the new normal, but until then, the market could remain challenging for home shoppers, who will see fewer options and higher prices."
Is Renting the Better Option?
Housing starts surged in May by nearly 300,000 units, to 1.63 million, the highest since last May, with starts of both single-family and multi-family units rising sharply. As housing starts slowed in June, analysts at S&P Global said single-family housing activity has formed a bottom.
“Homeowners, homebuyers, lenders, as well as builders, are trying to adapt and predict interest rates, home prices, supply, demand, and the potential for a Fed-induced recession. As a result, builders may be reluctant to start new projects that would bring needed housing product to the market,” Jack Macdowell, chief investment officer and co-founder at Palisades Group, told Forbes.
Given the current real estate climate, some would-be home buyers find renting the most financially smart decision. Homeownership offers stability and tax benefits, but renting is cheaper than mortgage payments in 45 of the 50 largest cities in the United States, based on a May report by Home Bay, owned by Clever real estate. According to the report, the average monthly mortgage payment is $174 more than the average rent payment in the U.S.
The study analyzed the 50 most populous U.S. metros based on their price-to-rent ratios, calculated by dividing the median home price by the median annual rent and comparing the cost of buying a home to the cost of renting expressed as a ratio. A ratio of 15 or lower generally means it's better to buy, while 21 or higher means it's better to rent.
Source: Investopedia
