For the first time since 2008 mortgage rates are over 6%. That means the actual cost for home buyers to take out a loan has doubled over the past nine months.
Holden Lewis is a senior writer, mortgage reporter and a spokesperson for NerdWallet, an online financial advice company.
Lewis spoke to WCCO Radio’s Drivetime with DeRusha about what this means for the home buying, and selling, markets with such a drastic change to borrowing.
Jason DeRusha: 6%, if you're old, seems like it's not that big of a mortgage rates since I'm sure my parents will happily tell the story of the home loan they took out for 18% back in 1970-whatever. But for the modern era, 6% is high?
Holden Lewis: It is really high. The last time we've seen rates hit 6% was November of 2008. I'm an old guy. I'm 59 and my first mortgage was like 8 1/4% back in 1997. For this generation, for first time homebuyers today, they haven't seen anything like this.
DeRusha: And the reality is a lot of people probably have been shopping for homes that are really a little beyond their means. But they they've been able to do it because the mortgage rate is so low. I presume that the way people are going to be shopping for homes will change significantly when it costs this much more to borrow the money, right?
Lewis: Yes. You know, people shop for home based on the monthly payment they can afford. And these just skyrocketing mortgage rates have really, really dampened people's capacity to borrow. Back in, let me see, December of 2020 is when mortgage rates bottomed out. That month, the average 30-year fixed was 2.68%. Now, if you had a $1,800 a month mortgage payment, you could have afforded $444,000. You could have borrowed that much. Last month, the average rate was 5.22%, double, and you could borrow $327,000. So you lost what? $160,000, $170,000 in buying capacity just because of higher mortgage rates.
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DeRusha: If you didn't refinance your mortgage yet, is it too late?
Lewis: It's too late to refinance your mortgage. So, a lot of people, they refinance their mortgage so they can extract some of their equity and spend it on home improvements or something like that. The way people are going to have to do that from now on is get a home equity loan or a home equity line of credit.
DeRusha: Let me ask you this, because we had a financial analyst on with one of our other hosts, Chad Hartman, who said that mortgage rates are getting to a point where no one is going to move unless they absolutely have to. Do you agree with that?
Lewis: There's a term called rate lock in. It looks like it’s happening. I mean it really looks like it’s happening. And here's what that concept means. Let's say you refinanced or you bought a home when mortgage rates were below 3%. You got 2.75%, you're just sitting there on that super low rate.
And then you're thinking, ‘well, I'd like to move. I'd like to buy another house’, and you're like, ‘no, I'm not going to trade 2.75%, mortgage for a 6% mortgage. And so you can see already that the number of listings is down and that's probably a sign of rate lock in.
DeRusha: This is sort of my situation. I refinanced when rates got low, my mortgage is it's under 4% for a 30-year mortgage. I would love to move but it seems painful. That is real money. So that has a ripple effect on the whole economy, right?
Lewis: It really does because you're seeing this combination, it's not only the high interest rates but it's the inflated home values.
DeRusha: Why haven't prices gone down? Certainly as I've been browsing like the prices are still high?
Lewis: Well, I'm going to teach you another phrase, downward sticky. You've learned rate lock in, now you’re going to learn downward sticky. People are very reluctant to sell the house for less than they could have gotten, say when it was at the top of the market. So you're going to see people really hesitating to offer their homes for less than they could have gotten say in March. You know it's happening, but people are very reluctant to do it. That's really that's another reason that you're seeing a drop in home listings, people listing their homes for sale, it's because they can see that prices might be headed down. Then they just figure, ‘well then I'll just keep my home, I'll just stay where I'm at.’
DeRusha: It'll be a rude awakening for people who maybe have to move for a job change, or a change in family circumstance, or whatever the case may be. The days of getting thousands or tens of thousands or hundreds of thousands over asking price are gone?
Lewis: That's true. People aren’t going to get more than their asking price. But, you know, you have to keep in mind, when you look at say what your home was worth three years ago, the value of it has climbed so much that you're still, if you sell it now, you're still going to make a capital gain. You're still going to get a lot more than you paid for it.
If you end up buying a house at a much higher mortgage rates than you're paying right now, if that new house makes you happier maybe it's worth it.
DeRusha: If you're in a circumstance where you can maybe pay more for the down payment, or pay cash for it, it might be a decent time for you to go ahead and make that kind of move?
Lewis: The real big problem with that though is just the lack of homes for sale. If you want to buy a house, what's your choice? Maybe you want a four bedroom house and the only thing available is a three bedroom. Maybe you get lucky and find the house that you want.
Here's the problem though. Even with mortgage rates going up, people think, ‘oh well that's going to make house prices go down’. That probably indeed is happening in some markets, but with that limited selection, that still means sellers can kind of hold the line at least a little bit on the price.
DeRusha: Are we in this for a long time or is this likely going to get worse? What do you expect?
Lewis: Every time I make a prediction, I'm wrong. I think mortgage rates are going to be above, say 5.5% for the foreseeable future. This last week they averaged 6.20%. They could possibly go to 6.5%, I just don't know if they're going to stick that high for that long.
Really my main concern is people getting rate locked in their houses, not putting them up for sale and just staying there until they die of old age. That's a big fear of mine.
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