One of the logical concerns in this current environment of rising interest rates is how will house prices fare if interest rates rise? One way to answer this question is by discussing the number and percentage of existing mortgages by interest rate. For example, if most mortgages are secured at a low fixed rate, does a higher mortgage rate really matter? No, and yes, as I will explain below.
As of November 2018, the vast majority of homeowners with a mortgage have overfinanced and benefited from lower rates. I’ve been drumming this refinancing message since 2018, just like any other lender. In fact, 90%+ of mortgages in America have an interest rate of less than 5%, which Freddie Mac says is the current 30-year mortgage average.
That’s why most existing homeowners don’t care that mortgage rates go higher because their monthly mortgage payments remain unchanged. Further, unless mortgage holders with mortgage interest rates above 5% are struggling financially, they probably won’t care either. Because if they cared, they would have already refinanced at a much lower rate!
Finally, only about 5% of homeowners with mortgages have a floating rate mortgage, as we learned in a previous post. This means that 95% of homeowners with a 30-year fixed and 15-year fixed mortgage also have no problems.
If you’re an ARM holder, you might be a little nervous. Chances are, however, that by the time your introductory fixed-rate period ends, the mortgage interest rate will have fallen again. After all, we are in a 40+ year downward interest rate channel.
Number of mortgages based on interest rate
Here’s a great chart from Black Knight and Axios Visuals showing the number of mortgages per interest rate on April 14, 2022. Mid-April 2022 is a good time to check the data, as it is after the largest quarterly rise in mortgage rates since 1981.
The total number of mortgages in this chart is 53,585 million mortgages. So let me break down the percentage of mortgages at different 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 with different mortgage interest rates.
Mortgage interest below 2%: 0.53%
Mortgage rate 2% – 2.5%: 8.8%
Mortgage rate 2.5% – 3%: 24.5%
Mortgage interest 3% – 3.5%: 21.1%
Mortgage interest 3.5% – 4%: 17.7%
Mortgage interest rate 4% – 4.5%: 11%
Mortgage rate 4.5% – 5%: 6.7%
Mortgage interest 5% – 5.5%: 2.8%
Mortgage rate 5.5% – 6%: 2%
Mortgage interest rate 6% – 6.5%: 1.9%
Mortgage interest 6.5%+: 2.9%
Mortgage Rate Analysis
9.6% of all mortgage holders have a mortgage interest rate above 5%. The 4.8% mortgage holders with a mortgage interest rate of more than 6% seem to be being scammed. The problem must be either bad credit or 30-year fixed-rate mortgages that were taken out more than 25 years ago and never refinanced because they didn’t or couldn’t bear it.
63.3% of mortgage holders have a mortgage interest between 2.5% and 4%. This is the sweet spot where most Americans live.
I am deeply impressed by the 0.53% of US mortgage holders with mortgage interest rates below 2%. I’d be even more impressed if most mortgages are 30-year terms, but I doubt it. Maybe these mortgage holders were paying points to get their mortgage rates that low.
I belong to the 8.8% mortgage holders with a mortgage interest between 2% and 2.5%. Although my primary mortgage is a 7/1 ARM that closed in late summer of 2020, there were no fees (baked into the rate).
Expect homeownership durations to increase with rising rates
Before mortgage rates started rising in 4Q2021, the average length of home ownership was already increasing. With mortgage interest rates rising, we expect the average length of home ownership to continue to rise as homeowners rationally decide to hold onto their low-rate mortgages for longer.
The utility value of a home has plummeted as more people spend more time working from home since the start of the pandemic. Furthermore, 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 be invested in real estate in the long run.
It seems that no one knows the exact average length of home ownership in America. But here’s some information from ATTOM Data Solutions, Redfin, and First American Data & Analytics. The main takeaway is the trend.
Average home ownership in the US over time
According to ATTOM Data Solutions, the average term of ownership of a home in the US is about eight years. The tenure took a dramatic increase after the global financial crisis in 2009.
According to Redfin, the average US homeowner tenure is about 13.2 years. It has increased from about 10.1 years in 2012.
To get more detailed, here’s the average home ownership time in several major cities in America. It goes from just 6.9 years in Atlanta, Georgia to 14 years in cities like Los Angeles, San Francisco and San Diego.
Homeowners will rationally sit longer
If you are a homeowner with a mortgage, consider whether you intend to live in your home longer now that the mortgage interest rate is higher. Instead of moving to a bigger house after interest rates rise, you might just wait for mortgage rates to fall again. Or you can take this opportunity to look for better deals.
Personally, I bought my “forever home” in 2020 with the plan to raise my kids in it for at least 10 years. Ideally, I wouldn’t mind raising them until 2037, when my youngest starts college. Moving is a pain in the ass. That includes paying commissions, taxes, and transfer fees to sell a home.
That’s why I plan to push through my plans to own my house for at least 10 years. If I was much richer in 2030, I might buy a nicer home and rent out our current main home to build more passive income.
Higher rental period means lower supply
One of the reasons I predicted a median house price increase of 8% to 10% in 2022 is the persistently low supply. While higher mortgage rates reduce affordability for buyers, putting pressure on house prices, I suspect lower than expected supply will counterbalance and keep prices high.
As you can see from this one chart from Altos Research, the inventory of single-family homes is extremely low. Originally, it looked like the stock would rise to something like 600,000 – 800,000. But with mortgage rates rising, I suspect that won’t happen in the coming years as more homeowners sit or take up land. No wonder investors keep buying single-family homes?
By comparison, companies like Zillow and Goldman Sachs are calling for a home price increase of more than 16% by 2022 compared to my more measured 8% – 10% forecast. High single digit price hike seems more reasonable in the current environment.
According to Fannie Mae’s most recent National Housing Survey, 92% of homeowners say their current home is affordable. In addition, 91% of lower-income homeowners say the same, up from just 79% at the end of 2017.
As a result, only the most financially secure homeowners or those who absolutely must move are likely to move in this higher-interest-rate environment.
For those who have the financial means, I would try to find bargains and rent out your home with a low mortgage rate. Rents have supposedly gone up in double digits again, so you may want to lock in market forces.
Reader questions
Readers, are you planning to extend the length of your home ownership? Is anyone planning to rent out their home with their low mortgage rates and try to buy more real estate? Are you surprised about the mortgage percentages to interest figures?
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This post Expect the duration of home ownership to increase
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