Rising Interest Rates Prompting Homeowners to Stay in Place

The Great Recession still looms large in the housing market, as homeowners who took advantage of low interest rates at the beginning of the decade are increasingly electing to stay in their properties instead of trading up.

“Although homeowners have more equity today, most of them also have ultra-low-rate mortgages they locked in during the recession, when rates were consistently below 4%,” Urban Institute researcher Karan Kaul wrote in a Tuesday post that probed the reasons behind a steady decline in repeat home-buying in the United States. “If a homeowner with a 3.5% rate were to trade up to a bigger home, it would come with a new mortgage at the prevailing, higher rate.”

That trend has conspired to boost the ranks of first-time homebuyers, who in 2017 accounted for 60% of all purchase mortgages taken out with the Federal Housing Administration and other government-sponsored enterprises (GSEs) — a significant jump from the 40% before the financial crisis of the late 2000s.

Advertisement

“Compared with repeat buyers, first-timers have dominated the mortgage market for the past 10 years, and their share today is still high,” Kaul, a research associate at the non-partisan think tank, wrote. “We don’t see this changing anytime soon.”

In all, first-time homebuyers accounted for about 1.5 million home purchases in 2017, compared to approximately 1 million for those who had bought homes before. Those numbers, Kaul observes, represent a 180 from the pre-recession period from 2001 to 2007, when first-timers bought 900,000 to 1.3 million homes per year — compared to 1.4 million to 1.8 million purchases by repeaters.

All this will spell higher prices for first-time homebuyers and veterans alike, according to Kaul, whose analysis mirrors recent statistics from other sources. Real estate data firm CoreLogic, for instance, recently blamed a shrinking supply of homes and the interest rate environment for steadily rising home prices.

“One-third of millennial renters reported feeling they cannot afford a down payment to buy a home,” CoreLogic CEO Frank Martell said in its most recent report, released last week. “With home prices rising quickly over the past few years and supplies low, first-time homebuyers face ever-growing challenges to find and buy affordable entry-level homes.”

In Kaul’s view, the prevailing direction of the market means that starter homes will stay under ownership for far longer, while new home construction fails to meet strong demand for properties.

“Many homebuyers will likely find it much more economical to simply stay in their existing homes,” he concludes. “This will continue to dampen repeat buying volumes and continue the dominance of first-time homebuyers in the housing market.”

Written by Alex Spanko