One of the few good things to come from the 2020 COVID-19 pandemic was ultra-low mortgage rates that hovered around 3%, in part due to the Federal Reserve slashing interest rates to 0% in order to keep the economy afloat.
But those low rates, considered a great deal at the time, has caused unintended and unexpected consequences. The main consequence of these low rates is something called the “lock-in effect” caused by homeowners with those pandemic-era 3% interest rates making the choice to stay put in their favorably-financed home—even if it doesn’t meet their needs anymore—to avoid taking out a new mortgage at the current rate of 7% or more according to Freddie Mac’s most recent data.
This “freeze” is unlikely to thaw anytime soon. According to a new survey from Bankrate, 47% of current homeowners indicated that in order for them to move, mortgage rates would need to fall to the 5% mark or lower for them to be comfortable changing homes. Further, 38% said they are waiting for mortgage rates to fall below 4% to buy or move.
Bankrate’s key takeaways:
- Homeowners are pining for pandemic-era mortgage rates. More than half of homeowners (52%) say they would need a mortgage rate lower than 6% to feel comfortable buying this year.
- Today’s mortgage rates feel high. Just 2% of homeowners say they would be comfortable purchasing a home this year at a mortgage rate of 6% or higher.
- Homeowners don’t feel motivated to sell. A mere 5% of homeowners say they would be comfortable selling their home this year with mortgage rates at 6% or higher.
What mortgage rate would motivate homeowners to buy?
Breaking out of the lock-in effect requires homeowners to list their homes for sale so they can move up, downsize, or otherwise move on. In our survey, we asked homeowners: How low do mortgage rates need to be to make that happen?
Among current homeowners, 47% say mortgage rates need to be below 5% for them to feel comfortable buying a home this year. Fully 38% say rates would need to be below 4%.
Overall, more than half of homeowners (52%) say they would need a mortgage rate lower than 6% to be motivated to buy this year.
Meanwhile, some say they’d be compelled only if rates plummet. Twenty percent of homeowners say they’d need rates to plunge below 3% before they’d feel comfortable purchasing a home.
Nearly two in five homeowners (38%) say there is no mortgage rate that would make them comfortable buying a home this year.
Among non-homeowners, 31% say they would need a mortgage rate less than 5% to be comfortable buying a home this year, while one-quarter (25%) say something less than 4% is the magic number.
What would it take for sellers to put their homes on the market?
Many homeowners would need to sell one home to be able to buy another. Some 30% of homeowners say mortgage rates need to be less than 5% for them to feel comfortable selling their home this year, while 21% say they’d need rates of less than 4%.
Overall, 35% of homeowners say they need a mortgage rate less than 6% to be comfortable selling their home this year.
Only 5% of homeowners say they would be comfortable selling their home this year with mortgage rates at 6% or higher.
Crucially, 42% of homeowners say there is no mortgage rate at which they’d be comfortable selling their home this year.
Click here for the study in its entirety, including interactive graphs and charts.
