98% of people have a below-market mortgage rate—that's keeping housing inventory tight
Johnas Street and his wife were living in a one-bedroom home in the Bay Area with their, at the time, three kids (they’ve got four now). Then the pandemic happened, and the couple started working from home. In April 2021 they closed on a six-bedroom, $650,000 home in Charlotte, where Street has family. They locked in a 30-year fixed rate at 2.62%, and it’s keeping them there.
“California is home for us, and eventually we’ll go back,” Street told Fortune. “I will say, I don’t know if stuck is the right word, but a 2.62% interest rate is hard to give up right now.”
The housing market has been on a wild ride over the last few years. Starting with the Pandemic Housing Boom, a short-lived era of low mortgage rates and a surge in demand as people shifted to remote work, and ending with a correction that’s lost steam. Still, 98% of outstanding borrowers have a below-market mortgage rate, according to an estimate from Goldman Sachs, and that’s constraining both sides of the market.
Look no further than Street and his wife, who in their mid-to-late thirties work in tech with remote roles that might not last forever. They know that, so they’re looking to move back as more positions in their field transition to hybrid work. But it would cost them a lot to sell their home with a rate below 3% and buy another in San Francisco (or anywhere in the Bay Area), with an average home value that’s much higher than Charlotte’s, coupled with rates that are pushing 7%.
“It’s really keeping us…that’s so much more money in our pockets,” Street said. “That’s so much more money for our kids, you know what I mean, so it’s kind of tough to leave that.”
Mortgage rates that were previously below 3% spiked to above 7%, and currently, the average 30-year fixed rate is hovering around 7%, with the latest reading at 6.94%. That’s of course down from a peak of 7.37% last year, but still much higher than the 3% people got used to during the pandemic. Let’s take a look at the difference that makes in Street’s monthly mortgage payment. On a $500,000 loan with a 30-year fixed rate at 2.62%, his monthly mortgage payment comes out to roughly $2,007 (without taxes and insurance). With the same circumstances but at a 7% rate, his monthly mortgage payment would be around $3,327. That’s a roughly $1,320 monthly difference and a $15,840 difference annually. That’s not taking into account the difference in home values between Charlotte and the Bay Area.
Outstanding borrowers like Street who have a below-market mortgage rate are fueling the so-called lock-in effect or the golden handcuffs of mortgage rates. To put it simply, would-be sellers are holding on to their homes in fear of losing their low rates. With Street’s case, in choosing not to move back to California and buy a home there, retaining their current home in North Carolina, the market lost both a buyer and a seller. Not to mention that Street told Fortune that he gets tons of messages from people wanting to buy their home, likely because of a lack of supply.
As of last month, there were 22.7% fewer newly listed homes for sale compared to last year, according to Realtor.com. All the while, new listings remained 29.4% below pre-pandemic levels. The difference primarily amounts to a segment of people that have almost disappeared from the market: move-up buyers and sellers.
It’s clear that selling a home with a rate below 3% and buying another with a rate over 6% doesn’t make financial sense because of that substantially larger monthly payment. That’s exactly why homeowners are holding on to their low rates and not selling. Some are even becoming “accidental landlords” to keep their low rates.
Take Josh Dudick, CEO and founder of wealth and investment website Top Dollar, who previously told Fortune he was thinking of selling his vacation home in the Hamptons with a 30-year fixed rate below 3%, but decided to rent it out instead. Dudick said he didn’t want to lose that “really low mortgage rate” he locked in. And Bob Wood, finance and economics professor at the University of South Alabama, previously told Fortune that despite wanting to downsize, “it just doesn’t make sense” to sell his home in Mobile with a 15-year fixed rate below 3%.
Even homeowners that want to move feel like they can’t because they’re trapped by their low mortgage rates that were once considered a financial win. This all translates into fewer homes coming into the market, which puts pressure on the supply side and the demand side because every homeowner that decides not to sell equates to one less buyer.