Could the ultra-low interest rates people have been enjoying for so long become a drag on the market? Some analysts have been making the case that so-called mortgage-rate lock could become a significant friction in the residential real estate market as interest rates rise, because homeowners will be reluctant to sell their house and move up, because doing so would mean they’d have to give up their low interest rates for something higher.
But NAR Chief Economist Lawrence Yun says fears of mortgage-rate lock are overblown. Speaking at a real estate policy conference in Washington July 24, Yun cited NAR research showing 70 percent of households who put their house up for sale do so for reasons having nothing to do with financial calculations. Instead, they take the plunge because they want a bigger house or they have to move for a job or because they want to live in a different neighborhood. Only about 10 percent think about whether their next house will cost them more or less in financing. What’s more, about a third of homeowners today have no mortgage whatsoever, effectively taking a big chunk of homeowners out of the mortgage calculation altogether.
“Cheaper isn’t the reason people move,” Yun said.
Without a doubt, households face an environment of rising interest rates, and that will have an impact, Yun said. But long-term mortgage rates won’t rise rapidly in the near term. He predicted the average rate to reach 5 percent early in 2015, a level that’s still historically low. If rates were to move up higher, it would surely curb homeowners’ appetite to sell and buy up, but Yun drew on what happened in the late 1970s and early 1980s to suggest the impact would be short term. In 1978 rates were 8 percent and then rose to an outrageous 18 percent, which led to a big drop in sales, but as rates started to improve, sales quickly picked back up, even though they didn’t get back down to the level they had been at before.
What seems to be a bigger reason some households are staying in place is rising rental rates, Yun said, because higher rates make it more attractive for owners who want or have to move to keep their house, rent it out, and buy another house without selling their old one first. Yun called these households accidental landlords, because they’re not in the business of renting out their property but they see an opportunity in today’s environment. These accidental landlords, Yun said, “are not affected by the mortgage-lock effect.”
More fundamentally, it’s low inventories and overly tight credit restrictions that are having the biggest impact on markets, Yun said, and he noted that the federal qualified mortgage (QM) rules that took effect earlier this year are not helping matters. Lenders have put in place credit “overlays” to help ensure they meet the requirements of QM’s ability-to-repay rules, and these restrictions are making it tough for even creditworthy households to get financing. Other federal polices, like high FHA mortgage insurance premiums, are posing another hurdle.
To be sure, a reluctance to give up an ultra-low mortgage rate is keeping some homeowners from moving up the homeownership ladder, but the issue right now is more theoretical than real, Yun suggested.