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Home » Low Mortgage Rates Could Hurt First-Time Home Buyers for Years To Come By Realtor.com

Low Mortgage Rates Could Hurt First-Time Home Buyers for Years To Come By Realtor.com

Paper house under a magnifying lens
SvetaZi / iStock

Record-low mortgage interest rates have been a boon for buyers on a budget, even luring those who have been on the sidelines into the housing market. But that influx of buyers has made an already severe housing shortage worse—and the impact of those low rates on the housing supply is likely to reverberate well into the future.

First-time buyers, whose ranks have swelled with city refugees seeking more space in the suburbs, are now duking it out over an extremely limited number of affordably priced homes for sale—in the middle of both a pandemic and an economic recession.

As the economy recovers and rates rise over the next few years, many homeowners who bought or refinanced their mortgages this year may hold on to their properties longer. After all, who wants to take out a more expensive loan to buy a new home when the existing one will do?

That could hurt first-time buyers for years to come if there aren’t enough starter homes to go around.

“[If] rates move up and you want to trade up to a bigger home, you not only have to pay more for the bigger home, but you would also have to pay more to borrow money. That starts to make it less appealing to trade up,” says realtor.com® Chief Economist Danielle Hale. “There could be fewer entry-level properties for resale. It creates a scarcity of homes for first-time buyers.”

Rates averaged just 3.03% as of July 9 for a 30-year fixed-rate mortgage, according to Freddie Mac. Some lenders are offering rates in the high 2% range for the most qualified borrowers—leading to a crush of buyers and homeowners seeking to refinance their mortgages.

But as rates eventually tick back up again, even a single percentage point has the potential to add $100—or more—to a monthly mortgage payment and tens of thousands of dollars over the life of the loan. So it may seem more financially attractive to work with the home you have, especially if home prices continue to rise.

“They may wind up fixing up the homes they’re in and adding on to them, such as a bedroom or bathroom, as opposed to selling that one and moving to a new house,” says Rocke Andrews, president of the trade group National Association of Mortgage Brokers.

How mortgage rates affect housing inventory

This wouldn’t be the first time that homeowners appear to have held on to their homes longer because they were able to get a good mortgage rate. That’s what an analysis by mortgage data and analytics provider Black Knight found when looking at rates and home listings from 2013 to 2018.

“Homeowners who had low fixed-interest rates were the least likely to list their homes for sale,” says economist Andy Walden of Black Knight.

Homeowners debating upgrading their existing home or trading up to a new one will also likely take their home equity into consideration. Owners had a record nearly $6.5 trillion in equity available in the first quarter of 2020, according to Black Knight. That could be tapped for renovations rather than a down payment.

This could be problematic for today’s buyers—as well as the buyers of the future.

Even before rates hit new lows, the nation was in the throes of a housing shortage. A decade of underbuilding and a surge of older millennials and other buyers in the market had resulted in a challenging market for first-time buyers. Then the COVID-19 pandemic hit. Many homeowners weren’t comfortable allowing strangers in their abodes during a public health crisis, so they held off on listing or pulled the “For Sale” out of their yards.

As a result, the number of homes for sale was down 32% year over year in the week ending July 11, according to realtor.com data.

“Prior to the pandemic, we did see homeowners’ mobility trending lower over the last few years. We’d also seen an increase in home improvement spending,” says Joel Kan, an economist with the Mortgage Bankers Association, a trade group. “Low rates could play a part in this increased homeowner tenure.”

Future buyers shouldn’t start panicking

This doesn’t mean that folks planning on buying their first home a few years from now should worry just yet.

Builders could begin putting up more starter homes to meet the demand. And there will always be homeowners who need to move, whether they’re relocating for work or to be closer to family, want to downsize, or need more square footage to accommodate a growing family.

“People are always going to move, but less than if there was a [financial] incentive,” says Roland Weedon, president of Essex Mortgage, an Orange, CA–based chain of lenders. Clare Trapasso is the senior news editor of realtor.com and an adjunct journalism professor at the College of Mount Saint Vincent.

She previously wrote for a Financial Times publication, the New York Daily News, and the Associated Press. She is also a licensed real estate agent. Contact her at clare.trapasso@realtor.com. Follow @claretrap