The era of ever-lower mortgage rates is long gone, and it has been replaced by rates hovering around 7%. But landlords who locked in lower rates before or during the pandemic housing boom are not selling. In fact, some of them become “accidental homeowners” simply because they don’t want to lose their low rates of the past.
That being said, the so-called locking effect puts pressure on both sides of the market. There aren’t as many buyers looking for new homes and fewer sellers looking to upsize or downsize, if they end up with a mortgage rate more than twice as high as the old one.
Redfin chief economist Daryl Fairweather said Fortune that high rates restrict activity. “They look at their monthly payment, which is quite low if they locked in a 3% mortgage rate compared to what their monthly payment would be if they sold and bought again, which would be quite high given the high mortgage rates. , “said Fairweather. “And it just makes a lot of sense for them to keep that interest rate low.”
Although rates are down from their peak of 7.37%, the 30-year fixed mortgage rate came in at 6.57% on Monday. According Goldman Sachs, 99% of borrowers have a mortgage rate below 6% (i.e. the current market rate). Of these, 28% locked in rates at or below 3% and 72% locked in rates at or below 4%.
So if you took out a mortgage of $700,000 with a rate of 7%, your total monthly payment would be $4,657. But with a loan of the same size at a rate of 4%, your monthly payment would be $3,342. Let’s say it’s a 3% rate with the same loan amount, your monthly payment would be $2,951. These are the golden handcuffs of mortgage rates, and it prevents homeowners with low rates from selling and turning some into homeowners.
Fairweather said there is both anecdotal evidence and data showing landlords are holding on tight to their low rates. For example, new home listings for sale fell 21.7% year over year for the four weeks ending March 5, making it the biggest drop in two months, according Redfin. During the same period, the largest declines were seen in Sacramento (-45.6%), Oakland (-44.5%), Portland (-42.3%), San Jose (-42.1 %) and Seattle (-41.2%).
Michel Zuber, author of One rental at a time and former tech worker turned real estate investor, said Fortune that a 30-year fixed mortgage at a rate of 3% is arguably one of the best assets most homeowners will ever have.
“They shouldn’t be selling, they should be renting it out,” Zuber said, adding that several people on Twitter told him they were making about $1,000 a month after expenses doing just that, sarcastically adding that the prospect of it “doesn’t suck.”
As for those who may not want to deal with the hassle sometimes associated with renting out their property or even just being a landlord, Zuber said, “If you don’t like money, go for it. [and sell].” With his own properties, Zuber said he spent nine months refinancing all of his debt to less than 4% in late 2020 and early 2021, all fixed for 30 years.
“Inflation is real, but when you have an asset where the debt is fixed, and especially if it’s fixed at 3% and we’re operating at inflation above 3%, you win. It’s like printing money,” Zuber said. “It’s 30-year fixed rate debt, that’s the magic.”
CEO and founder of wealth and investment website Top Dollar, Josh Dudick, said Fortune that once mortgage rates dropped, around 2020 and 2021, he refinanced his vacation home in the Hamptons at a 30-year fixed rate below 3%. Dudick said he was considering selling but decided to rent it instead because he would have to pay capital gains on his return and lose that “really low mortgage rate” he had locked in. By renting it out, Dudick is covering his monthly mortgage payments and some, while the value of the home (which he originally bought for more than $1.5 million) has doubled, Dudick said.
“You can’t lock in that incredible leverage anymore, so at this point I plan to hold steady…I still have a really good leveraged return,” Dudick said. Fortuneadding that even if rates drop a bit, he does not plan to sell.
David Highbarger, agile coach and founder of Reaction Agility, said Fortune that he was considering selling his home in Florida but “hated the thought of wasting” his low 3% rate, particularly because he was considering a rate of around 6.5% for his next home. Highbarger bought the house just over a year ago, but had to move for personal reasons.
“When I started considering buying another house, I was blown away by the 6.5%…even with [a high credit] score, they still want 6.5%, which kills me,” Highbarger said.
After talking with his neighbors and learning how much they charge tenants for rent, Highbarger decided to rent it out, which now covers his monthly mortgage payment, insurance and taxes, earning him a small profit each month. . Highbarger said it “seems like a better return, better use of my money, than just owning it,” especially since the house is appreciating. Highbarger later added that the 3% rate is really what allows him to do this, and he hasn’t had much trouble so far given that there is “no shortage of people looking for rentals.
Los Angeles-based real estate agent with CompassMackenzie Stone said Fortune that everyone around her was buying, including her customers, and she had to be in on all the action. Stone bought her Los Angeles home in the summer of 2021 when rates were lower but expected to climb. His offer was one of 30, all above the asking price. She locked in a 30-year fixed rate in the top four, which Stone says “is absolutely insane compared to where they are today.”
Stone bought the house for more than $1.6 million and expects to sell it as its value increases, but she’s “really hanging on at this point just because of the low interest rate.” Instead of leasing it long-term, Stone leases it through Airbnb and make about three times his monthly mortgage due to the low rate.
With fewer sellers, stocks are tight and there is less supply. Zuber said Fortune that in “one market, there are actually three markets”, the luxury market, the market for home ownership and the market for first-time buyers. The luxury market is down, with purchases falling a record 44.6% year-over-year in the three months to January 31. according Redfin. The climb market is “dead, for the most part, because to move up the ladder you have to sell the first house,” Zuber said. But the market for first-time home buyers is hot because there isn’t enough inventory, which is exacerbated by homeowners who have locked in their rates low and are choosing not to sell.