A fascinating phenomenon is unfolding in the housing market, and it's time to unravel the story behind these 'locked-in' homeowners. Imagine, a situation where people are holding onto their homes, reluctant to let go, even as life changes occur. The reason? Those sweet, below-4% mortgages that many managed to secure during a unique period of interest rate repression.
But here's where it gets controversial: despite the benefits of these low rates, life events are forcing some homeowners to sell. And this is the part most people miss - the impact this has on the housing market as a whole.
According to data from the Federal Housing Finance Agency (FHFA), the share of below-3% mortgages outstanding has been on a downward trend since early 2020. In Q3, it stood at just 20.0%, the lowest since Q1 2021. This decline is a direct result of the Fed's monetary policies, which created a refinancing frenzy, leading to a tsunami of homeowners locking in these ultra-low rates.
The share of mortgages with rates between 3% and 3.99% has also decreased, reaching a low of 31.5% in Q3. When combined, the share of mortgages below 4% has dropped to 51.5%, the lowest since Q4 2020. This is a significant shift, considering that at its peak in Q1 2022, over 65% of mortgages had rates below 4%.
Now, let's talk about Adjustable-Rate Mortgages (ARMs). The share of ARMs has been consistently low since 2021, dipping to 4.0% in Q3. This is a far cry from the over 10% seen in 2013. Homeowners with ARMs originated when rates were low experienced a shock when rates began to rise in 2022. However, this phase seems to have passed, with the share of mortgages between 4.0% and 4.99% declining to 17.1%, the lowest on record since 2013.
The story gets more interesting when we look at mortgages with rates between 5.0% and 5.99%. This share has remained relatively stable, hovering around 10% of all mortgages outstanding. Currently, many fixed-rate mortgages fall within this range, with the average conforming 15-year mortgage at 5.44%, according to Freddie Mac.
Mortgages with rates of 6% or higher have seen an increase, rising to 21.2% in Q3, the highest since Q3 2015. This shift is a result of the refinancing boom in 2020, where many homeowners with higher-rate mortgages refinanced into lower rates. However, not everyone could secure a below-4% mortgage, and those with tarnished credit scores often ended up with rates in the 4% to 5% range.
The impact of these ultra-low mortgages cannot be overstated. They were a direct result of the Fed's reckless policies, which caused home prices to skyrocket by 50% or more in just two years. This, combined with the low interest rates, has effectively locked up a portion of the housing market. Homeowners are hesitant to sell and buy again, fearing the higher interest rates and costs associated with more expensive homes.
This 'lock-in effect' has had a significant impact on real estate brokers, mortgage brokers, and lenders, leading to a decline in transactions and originations, and subsequently, a plunge in commission and fee income. The result? Waves of mass layoffs and voluntary departures since late 2021.
However, life goes on, and despite the benefits of these low rates, some homeowners find themselves in situations where they must sell. Whether it's a new job, a return to the office, a divorce, or a natural disaster, these life events are forcing some to unlock their homes and pay off their mortgages. And as these 'locked-in' homes are sold, the share of these ultra-low mortgages slowly shrinks, gradually unlocking the housing market.
The question remains: how sustainable is this situation? With 'real' mortgage rates below the rate of inflation, these below-4% mortgages are essentially free money. The Fed's policies have created a unique and unprecedented scenario, one that has had a profound impact on the housing market. As we move forward, it will be interesting to see how the market adjusts and whether we can expect a return to more traditional mortgage rates and home prices.
