Certain homeowners are still determined to push ahead
The so-called “lock-in” effect has been one of the stories of the year when it comes to the mortgage market, keeping current homeowners in their properties and adding to the lack of available inventory across many regions.
That trend arose when mortgage rates started to tick upwards around the beginning of 2022, pinching affordability for many would-be buyers who suddenly saw their aspiration to own a home become much pricier.
Those Americans who took out a mortgage during the COVID-19 pandemic, meanwhile, had, for the most part, been able to secure a loan at a much cheaper borrowing cost because of the plunge in rates that occurred as the economy ground to a halt in March of 2020.
The run-up in rates means for the majority of those borrowers, it makes little sense to move, swapping their existing rate for a much higher one – but which current homeowners are still amenable to leaving their present low-rate environment?
Paul Carson (pictured top), co-founder and mortgage consultant at Philadelphia Mortgage Brokers, told Mortgage Professional America that move-up homebuyers were still active in his market, with some simply biding their time and getting ready to qualify for a new mortgage instead of being motivated purely by interest rates.
Urgency may not be as much of an issue for those buyer types, particularly if they aspire to move home but are still comfortable with their current living arrangements.
That’s a sharp contrast to aspiring first-time buyers. “On the other side of the coin, if you’ve got first-time homebuyers who have a strict deadline and put in a bunch of offers and none of them stick, some are forced to then rent again for another year, which they don’t want to do,” Carson said. “But they need somewhere to live and they don’t have the flexible living situation.”
The US housing market is showing signs of a gradual transition from a seller’s market to a buyer’s market, with existing home sales continuing to fall in June, according to the National Association of Realtors (NAR).
— Mortgage Professional America Magazine (@MPAMagazineUS) July 25, 2024
Read more: https://t.co/Oe5veqeCG6
How should brokers advise homeowners who may be ready to buy?
While the interest rate outlook may not be as important to some buyers as others, Carson said getting into granular details with clients weighing up a move from their current home has been especially important in the present market. “We want to logically prepare people: ‘here’s what we can do now,’” he said.
“‘If the numbers work for you today here’s what your payment’s going to be, here’s how much cash you need to buy the house, and hopefully at some point in the future we get a rate drop’.”
Teeing clients up for potential savings to consider and getting ahead of rate cuts means that when those rates do start to dip, hopeful buyers are already as prepared as possible to enter the market again.
Where is the ‘lock-in’ effect most pronounced?
The impact of the lock-in trend has by no means been uniform across the country, with a recent US News & World Report indicating that the so-called “lock-in gap” – the average mortgage rate in a region minus the average rate being paid there by current homeowners – is liable to fluctuate based on location.
Colorado came in as the state with the biggest discrepancy between homeowners’ average rate and the current market rate (3.45 percentage points), meaning a jump of over $1,000 in monthly payments, while Utah, Iowa, Minnesota, North Dakota, Oregon, South Dakota, and Washington all posted a similarly large gap.
Conditions are more favorable for those looking to move in Texas, where just 2.55 percentage points separate existing homeowners’ average rates (4.3%) and the average rate on a current mortgage (6.85%).
Carson said the Philadelphia metro market has continued to see a steady pace of activity, with houses usually snapped up relatively quickly by buyers. “Are there pockets that are soft? Sure. But overall, it’s a very competitive market,” he said.
“I look at it this way: if a house is priced well, and there’s nothing wrong, it’s probably going to go pending in about a week or less. And if it’s on the market for a month or longer, something’s off – whether it’s overpriced, whether it needs some work or maybe both.”
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