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Why Homeowners Aren’t Selling

missing for sale sign

With all the talk of a housing market crash, there’s not a lot of data to support it.

Sure, home price gains have moderated significantly after recording massive gains, but they’re still up year-over-year.

In fact, the median existing-home price was $389,500 in August, a 7.7% increase from a year earlier, per the National Association of Realtors.

That marked 126 consecutive months of year-over-year increases, the longest streak on record.

At the same time, the median sales price has fallen for two months in a row, signaling a potential top of the market. Still, most homeowners are staying put.

Most Homeowners Aren’t Going Anywhere

While it’s starting to feel more like a buyer’s market, given the more-than-doubling in mortgage rates since the start of the year, it’s certainly not a full-blown one.

While the higher mortgage rates may have seriously dented demand, there’s still the issue of short supply.

Per the same existing-homes report from NAR from August, unsold inventory fell to 1.28 million units as of the end of August.

That represented just a 3.2-month supply at the current monthly sales pace, and bucked the trend of five successive monthly increases in supply.

Additionally, existing home sales fell 0.4% from July to a seasonally adjusted annual rate of 4.80 million in August.

On a year-over-year basis, sales plummeted 19.9% from their 5.99 million pace during the same period in 2021.

In other words, homeowners aren’t selling. But why? With home prices still close to their recent peak, it sure sounds like a good time to sell.

The answer is fairly simple. Because there’s not a good replacement unless you already own one.

Existing Homeowners Have Low Fixed-Rate Mortgages with Small Loan Balances

Today’s homeowners are in incredible shape, yet another reason why a big housing downturn seems unlikely.

They’re sitting on record home equity and they hold record-low mortgage rates.

As I pointed out a week ago, the national loan-to-value ratio (LTV) is 29.5%, the lowest number since 1983.

Simply put, Americans own more of their homes than they have for nearly 40 years. And the banks own less.

At the same time, the average American has a fixed interest rate on their home loan that is well below current levels.

In fact, Redfin recently pointed out that 85.3% of Americans with a mortgage have an interest rate below 5%.

Even better, many millions of Americans have fixed mortgage rates in the 2-3% range. Millions more have fixed rates in the 3-4% range.

Consider that the latest weekly average for a 30-year fixed from Freddie Mac was 6.29%, and you’ll see why these homeowners ain’t going anywhere.

What It Would Look Like If a Homeowner Sold and Bought Today

20% down payment$700,000 Home Purchase (2016)$1.4 Million Home Purchase (2022)
Mortgage Rate3.25%6.00%
Monthly P&I$2,437.16$6,235.33
Property taxes$730$1,450
Homeowners Ins.$130$250
Total Payment$3,300$8,400
Difference+$5,100

Let’s consider a hypothetical homeowner that decides to sell their home and purchase a new one.

We’ll suppose they took out a 30-year fixed-rate mortgage set at 3.25% tied to a prior $700,000 home purchase. We’ll assume they bought their home in 2016 and put 20% down.

Their monthly principal and interest payment would be a low $2,437.16. They’re also paying roughly $730 in property taxes and $130 a month for homeowners insurance (mortgage impound account).

In total, their monthly housing payment is about $3,300. What a deal!

They’ve considered moving and the homes they’re interested in are going for around $1.4 million.

And no, these homes aren’t much bigger than what they currently own, and are actually quite comparable to what they have. Perhaps an extra bedroom and a bit more square footage.

The good news is their current home might sell for $1.2 million today thanks to rapidly appreciating home values over the past several years.

Considering that their outstanding loan balance is around $487,000, they’d have a nice chunk of change for the new down payment.

Still, if they want to put down 20%, they’d need $280,000. That would leave them with a $1,120,000 loan balance on their new mortgage.

Now let’s factor in their new mortgage rate of 6% (we’ll be conservative in their favor as jumbo loan rates can be lower these days).

That’s a monthly principal and interest payment of $6,714.97. Now let’s add the tax of $1,450 per month and the homeowners insurance for another $250 a month. Both are higher due to a higher sales price.

When we tally that up, it’s a total housing payment of about $8,400 per month.

That’s a difference of $5,100, or about a 155% increase in housing costs. So why sell unless you own multiple properties and can move into another one you own?

The only folks who might sell are those with lots of cash, such as a retiree who is downsizing (you can still be an all-cash home buyer with mortgage rates above 6%).

Or an investor who can cash out and not worry about buying a replacement property.

There are also the distressed sellers, though these have been few and far between over the past many years.

For these reasons, NAR Chief Economist Lawrence Yun is probably right in saying that housing “inventory will remain tight in the coming months and even for the next couple of years.”

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