One of the biggest hidden risks to the current housing market is that there are a lot of people that are living in homes that they own that they can’t move from, they’re locked in. This locked-in effect is going to have more to do with what happens with the real estate market in the next three-four years than any other factor, not mortgage rates not prices. Its people are locked into their homes. Why is that the case?
Well, what you have is a scenario where people who bought homes anytime in the last 20 years are in a position where they have a relatively low-interest rate depending upon when you purchased and or refinanced, you probably have a rate of 3% maybe 4%, not many people who are homeowners have rates five and above unless you purchased in the last 90 days or maybe even six months. You’re going to be 2-4%. Even if you bought in 2010 when rates were six or 7%, you probably refinanced maybe five years ago to get a 3% rate. The other thing is people who are in homes if you’re going to sell a house you need to buy a new house. There’s not much inventory, there’s more than there was a year ago but it’s still way less than a normal amount of inventory. So if you’re looking at homes, you’re going to find slim pickings. There’s not really anything good. The house you have is probably going to be more desirable. Even if you’re getting kind of antsy or kind of bored with your house maybe you want to move to a different area, you’re going to find as you look, there’s not much for sale that’s any good. The houses won’t be in as good condition. They won’t have the features you want and you might say well let me just fix up the house I have. And that’s what a lot of people are doing. Do you feel that way? Put a message in the comments if you’re seeing the same thing and your particular household.
Now, what about mortgage rates? Well, even if you want to go sideways and buy the same exact house you have now and you might say, look I paid 250 for my house. I can sell it for 500 or 550. I’ll go buy another 550 house in the town where I want to move to. And I’ll be even right? Wrong because now you’re going to be trading in your three-and-a-half percent mortgage for a 7% mortgage. So for the same price house, you might spend a thousand dollars a month more by the time you figure out property taxes and insurance, and the higher interest rate. So you’re going to say well for a thousand bucks, I can take out a home equity line and fix up my house or spend a thousand dollars a month on cash on buying things for my house.
So this locked-in effect is going to keep a lot of mobility from happening in the housing market. It’s also gonna affect the job market. If you want to move to take on a new job in another city, but you have to switch houses and go from 3% to 7%, that job better be really good. Because now you’re going to be locked in at a higher interest rate. Plus when you move homes, your property tax goes up. Most states have laws that even if your home value goes up dramatically, the property taxes can only go up incrementally. But if you jump to a new house, you’re going to be ratcheted up to a new tax. So don’t fall into that trap if you’re saying well this new house is the same price as when I’m selling my old house my taxes will be the same right? Maybe not. Disregard the old tax bill and get an estimate from the county on what your new tax bill would be. Be aware that this lock-in effect is going to have more to do with what happens to home prices and the sales rate of homes in the next few years, no matter what people think about if the prices are too high.