Credit Sesame discusses what higher mortgage rates in 2023 mean for home buyers and sellers.
Higher mortgage interest rates have built a brick wall between many would-be buyers and their dream homes. The hardship caused by higher rates for people trying to enter the housing market is well documented. However, the pain is also felt on the other side of the wall by anyone wishing to sell their home.
Sellers are hurt when high mortgage rates reduce the potential buyer market. In addition, homeowners looking to relocate may feel locked into their homes by the difference between their existing mortgage rate and what they may have to pay for a new home loan.
The housing market has cooled off across the country
The National Association of Realtors (NAR) reported that existing home sales fell by 0.7% in August. That one-month decline added to a stretch of falling home sales volume.
Year-over-year, home sales in August 2023 were 15.3% slower than a year earlier. Despite the slowing volume, the median existing-home sales price is up by 3.9% from a year earlier.
Home prices may have been resilient over the past year because the supply-and-demand dynamics of the housing market haven’t changed despite the slowing sales volume.
A year ago, there were 3 months’ worth of home sales volume on the market. The number now is exactly the same.
The reason is that higher interest rates drive buyers away from the market, but they have a similar effect on sellers.
Higher mortgage rates take dollars away sellers
One way to measure how higher rates have reduced buying power is to consider how much you could borrow with a given mortgage payment.
At the end of 2021, the average 30-year mortgage rate was 3.11%. Then, the steep and sustained rise in mortgage rates began. By the end of the third quarter of 2023, the average 30-year mortgage rate was up to 7.31%. Using a mortgage calculator from Zillow, it is possible to calculate how much you could borrow on a 30-year loan for a $2,000 monthly principal and interest payment at different interest rates.
| 30-year loan | At 3.11% | At 7.31% |
| Interest over the life of loan | $467,500 principal | $292,000 principal |
| Interest over life of loan | $252,190 | $429,389 |
| Total cost | £719,690 | $721,389 |
The difference between mortgage rates of 3.11% and 7.31% is about $175,700 for a $2,000 monthly payment. This translates to $175,700 less purchasing power for the same $2,000 monthly payment from 2021 to 2023. One way to think about this is that the rise in interest rates has transferred more of each monthly payment from principal to interest.
A buyer ends up paying a total of about $720,000 over the life of the loan at both example interest rates. At the higher rate, far more of the monthly payment is used to pay off interest instead of principal. This equates to a loss of purchasing power for the buyer, and a corresponding loss of available buyers for homes on the market.
The mortgage trap that makes relocation tougher
For homeowners who want to relocate or downsize, higher interest rates make the decision to leave their current homes more costly.
A homeowner currently paying an older mortgage may have an interest rate between 3% and 4%. Selling that home and buying a new one might involve switching to a mortgage with a rate above 7%. That may mean being unable to afford a home as valuable as the one they are currently in.
In short, for people who would need a new mortgage to change homes, being both a seller and a buyer is not a wash. It would mean trading into a less affordable mortgage.
Will 3% mortgage rates ever return?
Since higher rates can work against buyers and sellers, should both parties delay moving until mortgage rates return to normal?
If you expect 3% mortgage rates to return, you may wait a long time. A look at mortgage history suggests that current mortgage rates are more normal than rates in the 3% to 4% range
A Credit Sesame analysis of data from mortgage finance company Freddie Mac found that over the past 50 years, 30-year mortgage rates averaged 7.74%. Today’s mortgage rates are actually below average.
Over the past 50 years 30-year mortgage rates have been below 4% only 13.91% of the time. To put it another way, 30-year rates have been below 4% for a grand total of only about 7 of the past 50 years. That means such low-interest rates are actually fairly unusual.
In short, today’s mortgage rates are making things tougher for buyers and sellers than they were a couple of years ago. However, if history is any indication, these conditions may be here to stay.
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Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.
