Rising Mortgage Rates Present Challenges and Opportunities for Homeowners

As mortgage rates reach their highest level in 23 years, prospective home buyers in the United States are feeling the strain. However, for existing homeowners who have locked in their mortgage rates, there is reason to be thankful. Despite the overall increase, the median mortgage holder’s rate remains below 4%, providing some relief in an increasingly challenging housing market.

The rising housing costs have garnered significant attention, and for good reason. Home affordability in the third quarter of this year sank to its lowest level since 2007, as both home prices and mortgage rates continued to rise. This has created difficult conditions for potential buyers, leading to a decline in existing-home sales in September to their lowest level since 2010.

For homeowners who are not in a rush to sell their properties, the news of rising mortgage rates has had little consequence, except for potentially delaying their plans to sell. The median U.S. first-lien mortgage holder in September had a rate of 3.5%, which is the lowest it has been since the beginning of 2022. This statistic, along with recent interest rate quotes, highlights the rollercoaster ride that home loan interest rates have experienced since 2020.

The difference between the rates paid by typical borrowers and recent rate quotes underscores the financial incentive for homeowners to stay put. A homeowner with a 30-year fixed-rate mortgage at 3.5% would pay approximately $860 less per month on a $400,000 home compared to someone who purchased a home last week with a 7.79% mortgage rate, according to Freddie Mac’s most recent weekly average.

This unique dynamic in the housing market has resulted in fewer incentives for sellers to list their homes, leading to a shortage of available properties. At the end of September, there were only 1.13 million homes for sale, less than half of the pre-pandemic average. Consequently, the rate of home sales in September fell to its slowest pace since October 2010.

Despite the increase in mortgage rates, home prices have continued to rise. This can be attributed to the limited supply of homes on the market and reduced demand. The S&P CoreLogic Case-Shiller Indices for August are expected to show a 0.9% gain in home prices from July’s levels and a 1.6% increase compared to the previous year.

While higher mortgage rates pose more peril in other countries due to the structure of popular home loan products, the majority of U.S. buyers opt for longer-term fixed-rate loans, providing some stability in the market.

Although homeowners may have little financial motivation to sell, the decision to move is often driven by factors beyond finances. A survey conducted by Zillow revealed that even if mortgage rates were to fall, the majority of homeowners without plans to sell would still choose to stay put. However, financial motivations such as selling for a profit or securing a better deal on a new house were cited as popular reasons for prospective sellers.

Interestingly, the most commonly-cited catalyst for listing a home was related to preferences rather than profit. Homeowners expressed a desire to purchase a more upgraded house or one with more desirable features. Additionally, homeowners with loans requiring private mortgage insurance were more likely to consider selling.

In conclusion, while rising mortgage rates present challenges for prospective home buyers, existing homeowners have found some stability in their locked-in rates. The current housing market dynamics, characterized by a shortage of supply and reduced demand, have contributed to rising home prices. Despite the financial incentives, homeowners often prioritize personal preferences when considering selling their homes.