The era of ever-lower mortgage rates is long gone, replaced by rates hovering around 7%. But homeowners who locked in lower prices before or during the pandemic housing boom aren’t selling. In fact, some of them become “casual landlords” simply because they don’t want to lose their low rates of the past.
Given this, the so-called lock-in effect puts pressure on both sides of the market. There aren’t as many buyers looking for new digs, nor as many sellers looking to move up or downsize if they’re going to be stuck with a mortgage rate more than double the old one.
Redfin Chief Economist Darryl Fairweather said Wealth that high levels limit activity. “They’re looking at their monthly payment, which is quite low if they lock in a 3% mortgage rate compared to their monthly payment if they sell and buy again, which would be quite high given how high mortgage rates are,” said Fairweather. “And it just makes a lot of sense for them to stick with that low interest rate.”
Although rates are down from their peak of 7.37%, the 30-year fixed mortgage rate hit 6.57% on Monday. According to Goldman Sachs, 99% of borrowers have mortgage rates below 6% (or 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 take out a $700,000 mortgage at 7%, your total monthly payment will be $4,657. But with the same loan size at 4% interest, your monthly payment would be $3,342. Assuming it’s a 3% rate with the same loan size, your monthly payment would be $2,951. These are the golden handcuffs on mortgage rates and are preventing low-interest homeowners from selling and turning some into landlords.
Fairweather said there is both anecdotal evidence and data showing homeowners are holding fast to their low rates. For example, new listings for homes for sale fell 21.7% year-over-year in the four-week period ending March 5, making it the biggest drop in two months, according to Redfin. During the same period, the largest declines were observed in Sacramento (-45.6%), Oakland (-44.5%), Portland (-42.3%), San Jose (-42.1%) and Seattle ( -41.2%).
Michael Zuber, author of One rental at a time and a former tech worker turned real estate investor, said Wealth that a 30-year fixed mortgage at 3% is without a doubt 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, adding sarcastically that the prospect about that “it’s not not bad.”
As for those who may not want to deal with the hassles that sometimes come with renting out their property or even just being a landlord, Zuber said “if you don’t like money, give [and sell].” With his own properties, Zuber said he spent nine months refinancing all of his debt to below 4% around 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 the 30-year fixed-rate debt, that’s the magic of it.”
CEO and founder of wealth and investment website Top Dollar, Josh Dudik, said Wealth that after mortgage rates drop, around 2020 and 2021, he refinanced his vacation home in the Hamptons at a 30-year fixed rate below 3%. Dudik said he thought about selling, but decided to rent it out instead because he would have to pay capital gains on his return and lose that “really low mortgage rate” he had locked up. By renting it out, Dudik has covered his monthly mortgage payments and some, all the while the value of the home (which he originally purchased for more than $1.5 million) has doubled, Dudik said.
“You can’t lock in that incredible leverage anymore, so at this point I think I’m just going to hold steady … I still have a really good return on leverage,” Dudik said Wealthadding that even if rates fall a bit, he doesn’t plan to sell.
David Highbarger, agility coach and founder of Reaction Agility, said Wealth that he was considering selling his home in Florida but “hated the idea of wasting” his low 3% rate, especially because he was expecting a rate of around 6.5% on his next home. Highbarger bought the home just over a year ago, but had to move for personal reasons.
“When I started buying another home, I was amazed at the 6.5% … even with [a high credit] result, they still want 6.5%, which kills me,” Heibarger said.
After talking to his neighbors and learning how much they were asking tenants to pay for rent, Highbarger decided to rent it out, which now covers his monthly mortgage payment, insurance and taxes—making him a small profit each month. Highbarger said it “seems like a better return, a better use of my money than just owning it,” especially as the home appreciates. Highbarger later added that the 3% rate really allows him to do that, and so far he hasn’t had much trouble given that “there’s no shortage of people looking to rent.”
Mackenzie Stone, a Los Angeles-based real estate agent with Compass, said Wealth that everyone around her was buying, including her customers, and she had to get in on all the action. Stone bought his home in Los Angeles in the summer of 2021, when prices were lower but expected to rise. Her bid was one of 30, all above the asking price. It locked in a 30-year fixed rate in the low fours, which Stone said “is absolutely crazy compared to where they are today.”
Stone purchased the home for more than $1.6 million and expects to eventually sell when it increases in value, but she’s “really holding on at this point just because of the low interest rate.” Instead of renting it out long-term, Stone rents it out through Airbnb and makes about three times his monthly mortgage because of the low interest rate.
With fewer sellers, inventory is tight and there is less supply. Zuber said Wealth that in “one market there are actually three markets”, the luxury market, the upmarket and the first-time buyer market. The luxury market is down, with purchases falling a record 44.6% year over year in the three months ended Jan. 31, according to Redfin. The move-up market is “dead for the most part because to move up, you have to sell the first home,” Zuber said. But the first-time buyer market is hot because there isn’t enough inventory, exacerbated by homeowners who have locked in their low prices and are choosing not to sell.