One of the logical concerns in this current rising interest rate environment is how will home prices fare as interest rates go up? One way to answer this question is by discussing the number and percentage of existing mortgages by interest rate. For example, if most of the mortgages are locked in at a low fixed rate, do higher mortgages rates really matter? No, and yes as I’ll explain below.
Since November 2018, the vast majority of homeowners with a mortgage have refinanced and taken advantage of lower rates. I’ve drummed this refinancing message since 2018 as so has every other lender. In fact, 90%+ of mortgages in America carry an interest rate of less than 5%, which is the current 30-year fixed-rate mortgage average according to Freddie Mac.
Therefore, most existing homeowners don’t care that mortgage interest rates are trending higher because their monthly mortgage payments remain unchanged. Further, unless mortgage holders with mortgage rates over 5% are struggling financially, they likely also don’t care either. For if they cared, they would have already refinanced to a much lower rate!
Finally, only about 5% of homeowners with mortgages have an adjustable-rate mortgage as we learned in a previous post. Therefore, this means that 95% of homeowners with 30-year fixed and 15-year fixed mortgages are also unaffected.
If you are an ARM holder, you might be a bit nervous. However, chances are good that by the time your introductory fixed-rate expires, mortgages rates will have come back down again. After all, we’re in a 40+-year downward interest rate channel.
Number Of Mortgages By Interest Rate
Here’s a great chart by Black Knight and Axios Visuals highlighting the number of mortgages by interest rate as of April 14, 2022. Mid-April 2022 is a great time period to check the data because it is after the largest quarterly mortgage rate increase since 1981.
The total number of mortgages in this chart is 53.585 million mortgages. Therefore, let me break down the percentage of mortgages at various interest rates.
Percentage Of Mortgages At Different Interest Rates
Seeing the percentages is more insightful than just seeing absolute numbers. So here are the percentages of mortgages at different mortgage interest rates.
Mortgage interest rate below 2%: 0.53%
Mortgage interest rate 2% – 2.5%: 8.8%
Mortgage interest rate 2.5% – 3%: 24.5%
Mortgage interest rate 3% – 3.5%: 21.1%
Mortgage interest rate 3.5% – 4%: 17.7%
Mortgage interest rate 4% – 4.5%: 11%
Mortgage interest rate 4.5% – 5%: 6.7%
Mortgage interest rate 5% – 5.5%: 2.8%
Mortgage interest rate 5.5% – 6%: 2%
Mortgage interest rate 6% – 6.5%: 1.9%
Mortgage interest rate 6.5%+: 2.9%
Mortgage Percentage Analysis
9.6% of all mortgage holders have a mortgage rate above 5%. The 4.8% of mortgage holders with over a 6% mortgage rate seem to be getting ripped off. The issue must either be bad credit or 30-year fixed-rate mortgages that were taken out 25+ years ago and were never refinanced because they couldn’t or couldn’t be bothered.
63.3% of mortgage holders have a mortgage interest rate of between 2.5% and 4%. This is the sweet spot where most Americans reside.
I’m thoroughly impressed by the 0.53% of American mortgage holders who have a mortgage rate of under 2%. I’d be even more impressed if most are 30-year fixed-rate mortgages, but I doubt it. Perhaps these mortgage holders paid points to get their mortgage rates so low.
I’m part of the 8.8% of mortgage holders who has a mortgage rate between 2% and 2.5%. Although my primary mortgage is a 7/1 ARM taken out in the late summer of 2020, there weren’t any fees (baked into the rate).
Expect Homeownership Tenure To Increase With Rising Rates
Before mortgage rates began to rise in 4Q2021, the average homeownership tenure was already increasing. With an increase in mortgage rates, expect the average homeownership tenure to continue to increase as homeowners rationally decide to hold onto their low fixed-rate mortgages for longer.
The utilitarian value of a home has gone way as more people are spending more time working from home since the pandemic began. Further, more people are recognizing the value of owning real estate for wealth creation, passive income, retirement income, and stability. As a result, more capital will invest in real estate over time.
It doesn’t seem like anybody knows the exact average homeownership duration in America. But here is some information by ATTOM Data Solutions, Redfin, and First American Data & Analytics. The main takeaway is the trend.
Average U.S. Homeownership Tenure Over Time
According to ATTOM Data Solutions, the average U.S. homeownership tenure is about eight years. The tenure took a dramatic increase post the global financial crisis in 2009.
According to Redfin, the average U .S. homeowner tenure is about 13.2 years. It has risen from about 10.1 years in 2012.
To get more granular, here is the average homeownership tenure in various major cities in America. It goes from as low as 6.9 years in Atlanta, Georgia to as high as 14 years in cities such as Los Angeles, San Francisco, and San Diego.
Homeowners Will Rationally Stay Put For Longer
If you are a homeowner with a mortgage, just ask yourself whether you plan to live in your home for longer now that mortgage rates are higher. Instead of moving to a bigger house after rates have jumped, maybe you’ll just wait things out until mortgage rates go back down. Or, you might use this opportunity to hunt for better deals.
Personally, I bought my “forever home” in 2020 with the plan of raising my kids in it for at least 10 years. Ideally, I wouldn’t mind raising them until 2037, when my youngest may go to college. Moving is a pain in the ass. So is paying commissions, taxes, and transfer fees to sell a home.
Therefore, I plan to follow through on my plans to own my home for at least 10 years. If I’m much wealthier by 2030, then I might buy a nicer home and rent out our current primary residence to build more passive income.
Higher Homeowership Tenure Means Lower Supply
One of the reasons why I forecasted an 8% – 10% median home price appreciation in 2022 is due to continued low supply. Although higher mortgage rates decrease affordability for buyers, thereby putting downward pressure on home prices, I suspect lower supply than expected will act as a counterbalance and keep prices elevated.
As you can see from this one chart from Altos Research, single family home inventory is extremely low. Originally, it looked as if inventory might rise to about 600,000 – 800,000. But with rising mortgage rates, I suspect it no longer will over the next couple of years as more homeowners stay put or land grab. Is there no wonder why investors continue to buy single-family homes?
For comparison, firms like Zillow and Goldman Sachs are calling for 16%+ home price appreciation in 2022 versus my more measured 8% – 10% forecast. High single digit price appreciation seems more reasonable in today’s environment.
According to Fannie Mae’s most recent national housing survey, 92% of homeowners say that their current home is affordable. In addition, 91% of lower-income homeowners say the same thing, up from just 79% at the end of 2017.
As a result, only the most financially secure homeowners or those who absolutely need to move will likely be moving in this higher interest rate environment.
For those who have the financial means, I would try and find bargains and rent out your house with a low mortgage rate. Rents are supposedly up double digits again, so you may want to capture market forces.
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