It’s early 2024, you’re sitting pretty with your 2.75% mortgage from a few years ago, locked into one of the lowest rates in history. But times have changed – rates are now over 7% and rising. You need a bigger house for your growing family, but taking on a new mortgage at today’s rates could potentially double your monthly payment. What to do? Stay put and make it work, or bite the bullet? It’s a conundrum facing many homeowners today, especially here in Southern California, causing the market to freeze up. With less inventory, prices keep climbing. First-time buyers are priced out. This perfect storm is unprecedented, with no clear solutions in sight. Strap in, it’s going to be a bumpy ride.
The Current State of the Housing Market
The California housing market is at a bit of an impasse right now. On one hand, mortgage rates have been rising for a couple of years and show no signs of stopping. Many homeowners locked in ultra-low rates over the last decade and are reluctant to give them up. This means fewer existing homes are being listed, creating fierce competition and rapid price increases for the homes that do hit the market.
Skyrocketing Home Prices and Mortgage Rates
Home prices have been climbing at an astonishing pace, up over 20% nationally in just the past year alone. At the same time, mortgage rates have more than doubled from their historic lows, now topping 7% for a 30-year fixed-rate loan. This combination of higher home prices and interest rates is creating an affordability crisis, especially for first-time homebuyers.
Homeowners Opting to Stay Put
Current homeowners with rates under 3% have little incentive to sell. Even if they purchase a comparable property, their mortgage payments would go up significantly if they bought another home at today’s rates. Many are choosing to renovate their existing homes instead of trading up to avoid significantly higher payments. This “locked-in” effect is exacerbating the housing shortage.
A Lose-Lose Situation
We’re in a bit of a lose-lose situation. Homeowners may be stuck in properties that no longer suit their needs. Buyers face limited options and are priced out of the market. The housing market relies on a steady stream of existing homes being listed and sold, so low inventory poses a threat.
There are no easy answers, but paying off a low-rate mortgage before selling or buying in a more affordable area are options for some. For the market overall, slowing price gains and stabilizing rates could help restore balance. But uncertainty is the predominant sentiment in today’s housing market.
How Low Mortgage Rates Impacted Homeowners
If you were lucky enough to lock in an ultra-low mortgage rate over the last decade, you’re doing quite well in more ways than one. Not only do you have an affordable monthly payment, but your home value has likely skyrocketed. The problem is, while your home equity looks great on paper, actually accessing that money usually means selling your home and buying another at today’s higher rates.
Ouch. Talk about being stuck between a rock and a hard place. So, what to do? Do you stay or do you go? That’s the tricky question facing many homeowners right now. On the one hand, interest rates are on a rollercoaster ride, and the longer you wait, the higher your rate may be on your next home. But if you sell now, you’re also giving up that sweet low rate you’re locked into. There are a few factors to consider here.
Your needs have changed
If your home no longer meets your needs, whether due to family size, job location, or other lifestyle changes, you may have no choice but to move on from your low rate. In this case, you’ll want to explore options to keep your housing costs under control, like making a larger downpayment on your new home to get a lower rate, or exploring alternative financing options, such as looking for sellers who are willing to pay for a rate buydown when you buy their home.
Rates may not rise as fast as you fear
There’s no guarantee mortgage rates will continue spiking over the long run. If rates plateau or even drop in coming years, today’s rates may not seem quite so scary in hindsight. Unless you have a compelling need to move now, holding onto your low rate for the time being avoids the risk of future regret if rates stall or reverse course. For most homeowners, staying put is the most prudent choice, at least until the rate and housing markets gain more clarity.
There Are Options You Can Consider
Though it may seem impossible to sell your current home, move up to a bigger home, AND not double your mortgage payment, there are actually some options for you.
Assumable Loans
This is a concept that has barely been discussed in the last few decades. However, loans such as FHA, VA, and USDA loans are assumable loans. If you are selling your current home, there is a good chance that you have a substantial down payment, which is just what it usually takes to assume a loan.
You may very well come across a home that fits your needs and has a 3% or 4% current mortgage rate. This is a great opportunity for you to sell, move up, and still have a low-rate mortgage.
Builder and Seller Buy Downs
Rate buy-downs are where a seller agrees to pay points to lower your mortgage rate. This tactic is currently being widely used by home builders trying to close out their current standing inventory. Let’s say the current mortgage rates are at 7% or so. A builder or seller can agree to pay up to X amount of dollars to buy down your new mortgage. The downside is that it takes a lot of dollars in Southern California to lower the rate significantly. For example, the typical trade of dollars and rate is; for every ¼ of a percent in rate, the cost is about 1 point or 1% of the mortgage.
Let’s take a hypothetical example: You sell a $600,000 house and buy an $800,000 house. You are fortunate enough to have some equity in the house so you put down $300,000 and take out a loan for $500,000 (oversimplified of course, but you’ll get the picture in a sec). If the current rate of interest is 7% with no points, it would theoretically take 4 points or 4% of $500,000 to get your new mortgage to 6%. That’s a cost of $20,000 that the builder or seller would have to pay.
In a scenario where the seller’s house has risen 15% over the past 2 years, if we take emotion out of the equation, it is not exactly breaking the bank to help the buyer with 4% while still pocketing 11% of appreciation over that period of time. And yes, there are a few sellers who are willing to do this in today’s market. You can certainly find builders who will.
Bottom Line
You’re in a bit of a tough spot if you’re looking to move up right now. With rates more than double what they were a couple of years ago, you’d be looking at a huge jump in your monthly payment if you sold your cheaply-financed house. Can’t blame folks for staying put. But that means fewer homes for sale and prices keep climbing.
If you’re a first-timer with a regular job, the math may not work out anymore no matter how much you’ve saved up. This market is like nothing we’ve ever seen, and there’s no obvious fix coming down the pike. For now, you’ve gotta run the numbers and see if it still makes sense. But one thing’s for sure – it ain’t getting any easier out there in the near future.
However, for those selling and moving up, who are open to options as I have discussed above, there is a glimmer of hope. Feel free to reach out and discuss these options with me if you are interested.
