The spring housing market has surprised many experts by defying expectations that prices would cool and competition would ease. Despite higher mortgage rates, which typically cool both prices and demand, the housing market remains hot. The lack of homes for sale is a major contributing factor to the high prices. The lock-in effect is preventing many current homeowners from listing their homes for sale because the cost of moving up is so high.
The average rate on a 30-year fixed mortgage hit its latest high in October but dropped back into the 6% range for much of December and all of January. It rose back over 7% in February, which would typically be expected to cool the market. However, sales of newly built homes were nearly 6% higher in February year over year, defying the odds. Pending sales of existing homes were down 7% that month from the year before, highlighting the lack of supply rather than lack of demand.
The cost of moving up to a more expensive home has significantly increased in recent years. The average homeowner with a near record-low mortgage rate would see their monthly payment shoot up by 132%, or roughly $1,800, in order to move up to a 25% more expensive home. This is a stark contrast to previous years where the increase would have been much lower. Lower rates would ease the financial burden for many homeowners and make moving up more reasonable.
The lock-in effect is stronger in expensive markets such as California, where homes are the most expensive. The vast majority of borrowers today have mortgages with rates below 6%, with approximately 59% having rates below 4% and close to 23% having rates below 3%. While not all borrowers have record-low rates, those in pricey markets have more incentive to refinance and move up due to the lower breakeven point on the cost of a refinance.
A new report from Zillow shows that the U.S. now has a record-high 550 “million-dollar” cities, where the typical home is worth $1 million or more. This is an increase of 59 million-dollar cities compared to the previous year when home values were weakening due to rising mortgage rates. The high and still-rising home prices add to the challenges faced by potential homebuyers in the current market.
The spring housing market is defying expectations due to the lack of supply and the high cost of moving up for current homeowners. While higher mortgage rates might have cooled the market in the past, the current conditions are keeping prices high and competition strong. Lower rates would alleviate some of the financial burden for homeowners and make moving up more feasible. However, until the fundamental mismatch of supply and demand is addressed, inventory and affordability will continue to be pressing issues in the housing market.