This week’s insight homes in on the housing market and extreme mortgage rates (at least compared with recent history) facing both first-time home buyers and existing owners looking to move.
“Golden handcuffs” is a term used in the business world to describe a financial incentive designed to keep an executive with a company for an extended period. It’s a turn of phrase now uttered in the housing market – maybe you’re feeling it. Current homeowners are effectively discouraged from moving, since doing so would result – for millions of American families – in switching out a 3% mortgage for one north of 7%. In a sense, people are indeed “locked in” to their mortgage and their home.
One company is looking to change that. Roam, a real estate startup, hopes to use financial engineering to help would-be homebuyers acquire mortgages from existing homeowners through what’s known as “loan assumptions.” Assuming a loan is just what it sounds like – sellers transfer their mortgage to the buyer along with the property. The benefits for the buyer are obvious, but the seller can then raise their asking price, too. This arrangement is tricky in that it may require the buyer to come up with cash to cover the remaining purchase price after accounting for the mortgage balance.
Is this financial innovation going to happen? Scant chance. Even with rising borrowing rates, many lenders are reluctant to embrace the proposed change since it means additional work for less profit. Moreover, it’s estimated that just 1 in 5 active mortgages are eligible for an assumption (VA and FHA loans being those that might qualify).
Of course, if you own your home free and clear, this worries you little. With nationwide housing affordability now at the poorest level since 1985, a little out-of-the-box thinking is not such a bad thing. Bigger picture, as the Federal Reserve finishes its rate-hiking campaign, market interest rates are expected to hover at elevated levels for potentially years. That trend has incentivized homebuilding companies to open their spigots, and we are seeing some very modest improvement in new home construction, but stronger growth is seen in apartment buildings.
Overall, there are no definitive signs that the housing market will revert to levels seen pre-pandemic. That is good news for some homeowners, but folks looking to move and first-time buyers remain frustrated.