Record Equity Levels Unlikely to Spur Many Homeowners to Sell, According to First American Real House Price Index - Seite 2

“When rates fall, a potential home buyer can buy the same amount of home for a lower monthly payment or buy more home for the same monthly payment. The 30-year tailwind of declining mortgage rates has allowed homeowners to buy a home at one mortgage rate and then later sell and move into a more expensive home when rates are lower,” said Fleming. “This long-run decline in mortgage rates has encouraged existing homeowners to move out and move up.”

Existing Homeowners Locked In?

“In 2021, the housing market has seen faster house price appreciation, modestly rising mortgage rates and record low levels of homes for sale. While existing homeowners are sitting on historically high levels of equity and feeling wealthier, many of these owners have also secured historically low fixed-rate mortgages,” said Fleming. “There is a financial ‘lock-in’ effect that increases as mortgage rates rise and as the size of a mortgage increases. Instead of a tailwind, rising mortgage rates increase the monthly cost of borrowing the same amount that a homeowner owes on their existing mortgage. Why move out if you have to move ‘down’ or pay more to move up?

“The higher the prevailing market mortgage rate is relative to the homeowner’s existing mortgage rate, the stronger the lock-in effect. Additionally, the record low level of houses for sale makes it difficult to find the next house to buy, so sellers – who are also prospective buyers – don’t sell for fear of not finding something to buy,” said Fleming. “In short, existing homeowners are increasingly locked into their current homes as rates rise.

“Wealthier homeowners may feel locked into their existing homes, but first-time home buyers have no such financial lock. As of December 2020, nearly 50 percent of all purchase mortgages originated by Fannie and Freddie went to first-time home buyers. Additionally, buying a home is often prompted by lifestyle decisions more so than financial considerations,” said Fleming. “Despite a likely increase in the lock-in effect if rates continue to rise, we expect home sales will continue to remain robust, but it won’t necessarily be fueled by existing homeowners moving out and moving up as a result of the wealth effect.”