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A problem for the housing market: People won’t quit their cheap mortgages

Fewer homes are available because homeowners are hanging onto coveted rates of 3 or 4 percent

Homes in Rocklin, Calif., in December. People with cheap mortgages from before the Federal Reserve started raising interest rates are reluctant to sell and give up their low rates, even if they're ready to move. (David Paul Morris/Bloomberg)
8 min

When Colleen Randall bought her house in 2016 for $174,000, she figured it was the perfect starter home. Then the past few years made the deal even sweeter: She doubled the square footage after redoing her unfinished basement. Now the three-bed, three-bath house in Hagerstown, Md., is worth $260,000, minimum. Refinancing in 2020 also lowered her mortgage rate from 3.25 to 2.75 percent and knocked off her private mortgage insurance.

And that’s the problem.

Randall, 33, and her husband want to have a second child, but their third bedroom is a sunroom and wouldn’t work for a new baby. They would normally just look to move and sell to someone else looking for a first home. But they can’t imagine giving up their ultralow rate for a new mortgage above 6 percent on a bigger house. The more likely scenario: delay having another kid and stay put.

“My mortgage payment would essentially double if we purchased a house with around the same square footage, with just a better layout,” Randall said. “I just can’t do it. If I could predict the future, we’re probably going to stay where we are. It’s just too comfortable a position.”

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People like the Randalls are everywhere, and they’re causing unanticipated problems for the housing market. Home values soared in the past few years, as the pandemic reshuffled peoples’ housing needs, and buyers clamored for the few listings available. To cool that demand — and tame inflation throughout the economy — the Federal Reserve has been hiking interest rates at the fastest pace in decades. Those moves sent mortgage rates surging past 7 percent last fall, and while they’ve pulled back somewhat, the 30-year fixed rate is still around 6.35 percent, according to Freddie Mac.

But those increases are also discouraging owners from putting their homes on the market and forfeiting the low rates at which they borrowed money before last year. And that is cutting down on the supply of houses, especially for conventional starter homes that have long helped first-time buyers gain a foothold in the market.

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“The world is going back toward normal, but we still have the aftermath of what happened,” said Skylar Olsen, chief economist at Zillow. “That’s moving the housing market to behave this way.”

Striking a balance between supply and demand in the housing market is key to getting inflation under control. But experts say don’t see the logjam getting better until rates simmer down, which probably won’t happen until next year. Even then, the days of super low rates are likely over for a generation of home buyers who came of age when it was much easier to get a cheap loan.

The vast majority of homeowners have rates below today’s average. At end of 2022, 62 percent of mortgage holders had a rate below 4 percent, and 82 percent had a rate below 5 percent, according to Redfin data. A whopping 92 percent had a rate below 6 percent.

The number of new listings hitting the market are also far below normal levels, as millions of homeowners decide not to budge. In February, listings were down more than 23 percent from the year before, according to Zillow, and more than 32 percent from pre-pandemic levels.

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The drop is more dramatic in certain areas. Listings in Winston, N.C., were down 65.6 percent in February, compared to the year before, according to Zillow. In Milwaukee, 49.6 percent. Listings in Las Vegas dropped 39 percent, and in D.C., 36.8 percent.

The decline in listings is unusual, even compared to before the pandemic. By that measure, listings in Winston fell 67.3 percent, and in Las Vegas, 45.9 percent.

In normal times, Knoxville, Tenn., would have around 10,000 active listings at any given moment. But by the time Hancen Sale was shopping for his first home in late 2020 and early 2021, only 1,300 properties were for sale. He still managed to buy a three-bedroom, two-bathroom historic home with a 2.75 percent mortgage rate for $291,000.

Sale works for the Knoxville Area Association of Realtors and has seen how the pandemic turbocharged the college town’s housing market. In 2021, the annual income needed to afford the average house with a 10 percent down payment was $55,677, according to his research. By the end of 2022, it was $88,808. So at age 25, he can’t imagine giving his situation up, and if he ever did outgrow the house, he’d rent it out.

“It’s going to be hard for me, financially, to move elsewhere,” Sale said. “It’s kind of frozen me in place in a lot of ways. And even if I did move, it would probably be holding onto a house like this, because the rate is so low, it would be a good revenue-generating investment for me.”

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Meanwhile, scores of people are clamoring to find any homes available, even if that means taking on a high rate.

Emily Engel and Tyler Young have been trying to buy their first home together for six months — ever since Engel’s landlord told her he wanted to sell the property where she lives. The long-distance couple has been scouring for a home in north-central Connecticut for around $325,000. They’ve lost out on six offers.

Last month, they were getting ready to put in their seventh. But while they were on the phone with their real estate agent, they were told someone else had just put in a massive bid. The only way for Engel and Young to get back to the front of the line would be to put down an extra $100,000 — cash.

“There’s an overwhelming sense of hopelessness — that’s the word — that washes over me every time,” Engel said. “This is insane. We’re not going to win. We’re not rich. We don’t have $100,000 extra. I’m almost 40. Am I not mature enough to own a house? You feel like a kid.”

Engel said she doesn’t see any signs demand in New England is cooling. But the housing market is extremely sensitive to changes in interest rates, and there are some indications that the Fed’s moves are working as central bankers intended. The median existing-home price fell 0.9 percent in March from a year earlier, to $375,700, according to the National Association of Realtors. That marked the largest year-over-year price decline since January 2012.

Homes that do make it onto the market are taking longer to sell, which helps boost inventory and tame the buyer frenzy from earlier phases of the pandemic. Fed officials are betting that the slowdown will eventually trickle to the rental market, a crucial step since rent costs have become the main driver of inflation throughout the economy.

“We’re not seeing it yet in housing services,” Fed Chair Jerome H. Powell said in February. “But we expect to see that. We need that to happen. That’s another big part of the economy. It’s got to come. It should come in the second half of this year.”

But prices probably won’t drop markedly until there are simply more homes available. Experts have various estimates for how many more houses the country needs, with figures sometimes ranging from 1.5 million to 5 million. Last year, the White House unveiled its Housing Supply Action Plan, which aims to help close the country’s housing shortfall in five years.

Persistent supply chain issues, labor shortages and the rising costs of construction have few experts hopeful that the plan can come to fruition. But the trend is at least moving in the right direction; the number of listings coming from new construction has been steadily climbing since 2016. At the end of 2019, right before the pandemic, almost 19 percent of listings came from new construction, according to Redfin data. By the beginning of 2023, that figure had grown to more than 33 percent.

Still, there is a long way to go, especially when it comes to luring people with ultralow rates.

Jonathan Levitt, 32, took advantage of remote work and moved from Boston to Boulder, Colo., during the pandemic. In 2021, he bought a three-bedroom for $865,000. He locked in a 3.05 percent interest rate, and he estimated that if he bought the same house today, the monthly payment would be at least $1,000 higher.

Levitt keeps an eye on Zillow listings, and sees other, less-appealing homes in his neighborhood selling for $200,000 more than he paid. He’s put money into upgrading the house — with solar panels, a sauna and workout equipment. He might rent it out down the line. But he can’t imagine selling, or going back to his old Boston apartment with no outdoor space or parking.

“I’m losing money in that scenario,” Levitt said, “versus gaining.”