Home Sellers are in Short Supply!
The main reason home sellers are in very short supply can be answered in two words: mortgage rates. Folks who are happily ensconced in their homes and are paying a mortgage rate of about three percent (perhaps a bit more or a bit less), are all asking themselves a simple question: Why should I sell my home, buy another, and pay a mortgage rate well above seven percent? When doing so will drive up my monthly payments significantly, probably forcing a lifestyle change for the worse.
Secondly, during the pandemic, when rates were very low, many homeowners refinanced at rates of three percent or less. Guess what: Now that rates are above seven percent, the chance that many of these folks will leave the great “deal” they have are slim and none – and Slim moved to Texas! In essence, sellers are on strike.
The proof is in the numbers. The number of homes in the U.S. for sale in September fell to 1.11 million, down from 1.14 million in August and 1.16 million in July according to the National Association of Realtors (NAR).
To graphically state it, if we take, for example, a borrower who took a standard 30-year fixed mortgage of $400,000 at three percent he/she would have a monthly mortgage payment of $1,686. Borrowing the same amount on a standard 30-year fixed mortgage at 7% would increase the monthly payment to $2,661 – jump of 58% or $975 a month.
When we add to the equation that 85% of homeowners with mortgages are paying a rate of under 5%. We can now clearly see that the residential real estate market is swimming in very choppy waters.
But when there are less homes on the market for sale, the law of supply and demand kicks in: home prices are rising. But this combination of economic forces coalescing leads to a sharp slowdown in activity. And according to the NAR, existing-home sales fell again in September for the eighth straight month.
The only comfort a homeowner has is that since home prices keep rising (again due to a lack of inventory), a homeowner who decides to sell will be able to put down a higher down payment on his new home – effectively lowering the monthly mortgage payment. But when the calculations are carefully considered, homeowners are opting to remain in their homes, based on the numbers.
Therefore, for most sellers, this is just not enough of a boom to give up the very low mortgage rates they now have. A year ago, 30-year fixed rates were 3,22%, Today’s rate is 7.412%.
With the Federal Reserve set to raise rates again in July, in an effort to tame inflation, we can surely expect even higher mortgage rates to come.