“The only way you’ll take my sub 3% mortgage is to pry it from my cold, dead fingers.”
Homeowners Are Clinging to their Below-3% Mortgages for Dear Life as Mortgage Rates Went over 7%
By Wolf Richter for WOLF STREET.
These ultra-low-rate mortgages have become a huge gift from the Fed. Homeowners might not move, when they would otherwise move, because they don’t want to replace that 3% mortgage with an over-7% mortgage, and so sales of existing homes have plunged by about 25% from pre-pandemic times and have remained at those levels for four years.
From early 2020 through Q1 2022, the Fed had purchased trillions of dollars of mortgage-backed securities and Treasury securities with newly created money, and it cut its policy rates to near-0% and kept them there, all of it to impose all-out interest rate repression on the economy.
20%
Of
Residential Real Estate is Frozen!
This act pushed mortgage rates to historic lows, which created enormous demand for homes, which caused home prices to explode by about 50% in two years, and more in many markets. It caused other asset prices to explode as well, and it caused inflation to explode, eventually to over 8%, the worst inflation in 40 years, while mortgage rates were at 3% — massive negative “real” mortgage rates. It triggered a tsunami of refinancing into these low-rate mortgages. And now, very understandably, homeowners are clinging to their low-interest-rate mortgages for dear life and have thereby put the housing market on ice.
Life happens nevertheless – a job in a new city, death, divorce, more kids, nightmare neighbors, the need for a house without stairs, that sort of thing – and people sold their homes and paid off those mortgages since early 2022. But that process has come to a near-halt now, ensuring that the housing market will remain frozen.
Kinda reminds me of that old bumper sticker – “the only way you’ll take my gun is to pry it from my cold, dead fingers.” Substitute the sub-3% mortgages for the gun.
Who can blame the holders of those mortgages for keeping them? Anyone can use one of the online financial sites to calculate how much more they’d pay to switch to a current rate mortgage. A sobering difference – more than enough to make people tolerate a home that has some drawbacks for their current living situation.
People will part with those mortgages only when they absolutely must – the life change must be severe. Not an inconvenience, but a structural life change. Cosmetic life changes (like their son Billy wants his own bedroom instead of sharing one with his brother) won’t do it in this environment.
