The Optimal Percentage for Homeowners to Consider Relocating

After falling below 3% in January 2021, the average rate for a 30-year fixed-rate mortgage has climbed to above 7%, which presents a significant challenge for homeowners considering selling their homes.

At the current rates, homeowners would need to finance a new home at a higher rate than their existing one, resulting in a substantial increase in their monthly mortgage payments. As a consequence, many homeowners are opting to stay where they are.

According to Nicole Bachaud, a senior economist at Zillow, even if homeowners were to purchase a more affordable home, their monthly payments would still rise. Consequently, existing homeowners are either unable or unwilling to sell their homes due to the financial burden of acquiring a new mortgage.

However, recent reports indicate that homeowners exhibit a significantly higher willingness to sell their homes when their mortgage rates reach 5% or above. In a survey conducted by John Burns Research and Consulting, 71% of prospective homebuyers planning to finance their next home indicated that they would not accept a rate above 5.5%, identifying this rate as the optimal threshold.

Given that mortgage rates are unlikely to decrease in the near future, homeowners find themselves in a situation reminiscent of golden handcuffs. Similar to financial incentives offered by employers to discourage employees from leaving, homeowners are now bound by their low mortgage rates.

The majority of homeowners today have mortgages with interest rates below 4% or even below 3%, which they secured by moving or refinancing during the Covid pandemic. As such, there is a sizable population benefiting from exceptionally low mortgage rates.

Tomas Philipson, a professor of public policy studies at the University of Chicago and former acting chair of the White House Council of Economic Advisers, highlights the fact that numerous homeowners are currently holding onto very favorable mortgage terms.

A separate survey by Realtor.com reveals that nearly 82% of home shoppers feel “locked in” by their existing low-rate mortgages, further emphasizing the reluctance of homeowners to relinquish their advantageous borrowing terms.

According to Jacob Channel, a senior economist at LendingTree, we find ourselves in unfamiliar territory. During the period between 1978 and 1981, mortgage rates doubled from around 9% to over 18%, causing homeowners to hold onto their properties. However, Channel stated that unlike now, mortgage rates were not at record lows in the late ’70s and home prices did not rise as rapidly. Nonetheless, based on historical trends, there is a high probability that the housing market will regain momentum, just as it has in the past. Channel mentioned that while mortgage rates may not reach sub-3% levels anytime soon, there is no reason to believe that they will remain as high as they are indefinitely. Recent volatility has made it challenging to predict future rate movements, but Sam Khater, Freddie Mac’s chief economist, expects more clarity in September when the Federal Reserve decides its next steps regarding interest rate hikes.