Homeowners are clinging to their sub-4% mortgages for life as mortgage rates have risen above 7%

The real estate market, destroyed by extremely low mortgage rates, will remain so for longer.

By Wolf Richter for WOLF STREET.

Mortgages with rates below 4% – primarily the product of the Fed’s period of maximum interest rate suppression in 2020-2022 – have tightened their grip on homeowners, as they currently face mortgage rates above 7%.

Mortgages with rates below 3% fell slightly by 10 basis points to 19.2% of all mortgages outstanding in the second quarter. It took an entire year to reduce the share by just 1 percentage point, compared to 20.2% in the second quarter of last year (shown in red in the chart below). So this process is essentially at a standstill.

The share of mortgages from 3% to 3.99% decreased slightly by just 20 basis points in the second quarter, to 29.9% (blue), according to data from the Federal Housing Finance Agency.

All types of mortgages are included, from 30-year fixed rate mortgages, through 15 year fixed rate mortgages, to adjustable rate mortgages.

These ultra-low rate mortgages have become a huge giveaway from the Fed. Homeowners might not move, when they otherwise would, because they don’t want to replace that 3% mortgage with a 7%-plus mortgage, and so existing home sales have plunged about 25% from pre-pandemic and have stayed at those levels for four years.

From early 2020 through the first quarter of 2022, the Fed bought billions of dollars of mortgage-backed securities and Treasury securities with newly created money, and it cut its policy rates to near 0% and kept them there, all to impose total interest rate suppression on the economy.

This law pushed mortgage rates to historic lows, which created a huge demand for housing, causing housing prices to explode by about 50% in two years, and more in many markets. It also caused prices of other assets to explode, and it caused inflation to explode, ultimately to over 8%, the worst inflation in 40 years, while mortgage rates were at 3% – so negative “real” mortgage rates. This triggered a tsunami of refinancing into these low-rate mortgages. And now, understandably, homeowners are clinging to their low-interest mortgages for dear life and have thus frozen the housing market.

Life happens nonetheless – a job in a new city, death, divorce, more children, nightmare neighbors, the need for a house without stairs, that sort of thing – and people have been selling their homes and paying off their mortgages since early 2022. But that process has now all but stopped, ensuring that the real estate market will remain frozen.

Mortgages from 4.0% to 4.99% fell slightly by 10 basis points to a share of 16.5%, the lowest share in FHFA data dating back to 2013, and down from 2019’s high of 40%.

These mortgages are still attractive and worth keeping, compared to current mortgages of over 7%.

The share of mortgage loans from 5.0% to 5.99% increased to 12.0% of all outstanding mortgages in the second quarter, the highest since the first quarter of 2020 (blue in the chart below).

In the second quarter, regular 15-year mortgages were still being offered in this range, and some people were choosing them if they could afford the higher payment, because they would save a lot of interest over the life of the mortgage.

But in recent weeks – which will show up in third-quarter data – regular 15-year mortgages have moved into the 6%-plus category as mortgage rates have climbed across the board.

The share of mortgage loans over 6% reached 22.5% of all outstanding mortgages, the highest since the second quarter of 2015, compared to a share of 7.3% in the second quarter of 2022 (red in the graph). The majority of mortgage loans issued currently fall into this category.

Adjustable Rate Mortgages remained unchanged at a 4.3% share of all outstanding mortgages, down from more than 10% at the start of FHFA data in 2013.

Some ARMs had rates below 3% even before 2020 and were included in mortgages below 3%, which is one reason why the share of mortgages below 3% was above 0% even before 2020.

Homeowners whose ARMs were issued when rates were extremely low experienced payment shock when their mortgage rates adjusted to current higher rates. But the share of ARMs in circulation is very low and does not affect enough people to pose a systemic problem.

And home prices have skyrocketed in many markets since 2020, so if a borrower with an ARM experiences payment shock and can’t make the payment, they can often sell the house, pay off the mortgage with the proceeds, and come away with cash to figure things out again.

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