Homeowners who might want to sell their houses feel trapped by the low interest rates they have on their mortgages and are unwilling to have to start a new mortgage with today’s far higher rates, The Wall Street Journal reported.

“These ‘golden handcuffs’ are keeping the supply of homes for sale unusually low and making the market more competitive and pricey than some forecasters expected,” the WSJ said.

At the end of March, two-thirds of U.S. mortgages carried an interest rate under 4 percent, according to data service Black Knight. With 73 percent of mortgages having their rates fixed for 30 years, it can be hard for homeowners to trade that for a loan that cost 6.89 percent, the national average as of 15 May, according to Bankrate.com.

With the average home price now at $371,200, by data from the National Association of Realtors (NAR), an additional percentage point on a mortgage rate could add as much as $300 or more to a monthly house payment, depending on the amount financed.

About 56 percent of people planning to sell their homes and buy others in the next 12 months are waiting for interest rates to fall, according to a February survey by Realtor.com.

People who want to move to gain space for a growing family or home office, or to trade up to a better home or neighborhood, are clogging the housing market’s normal flow by staying put.

“The movement up the ladder is grinding to a halt,” Sam Khater, chief economist at the Federal Home Loan Mortgage Corp. told the WSJ. “It’s getting much harder for first-time home buyers to jump into the market because of the lack of supply.”

In April, there were only about half as many homes for sale as in April 2019, although there were more than the near-record low in April 2022, Realtor.com noted. The number of homes newly listed last month was 21 percent below that of a year earlier—an ominous sign for the year’s busiest selling season.

The average selling price of a home dipped 0.9 percent in March, year on year, according to the NAR. However, home sales that month dove 21 percent.

“It’s a unique market,” NAR chief economist Lawrence Yun said to the WSJ. “Sales are down, prices are down in some areas, yet it’s hard to get that home because buyers are competing.”

As a result, bidding fever still grips shoppers in some areas.

A home listed last month for $449,000 in Clifton, New Jersey, outside New York City, received 120 offers in six days and went under contract for $599,000.

“A lot of buyers are panicking right now,” Mahmoud Ijbara, the agent who handled the sale, said in a WSJ interview.

A healthy housing market has four to six months’ worth of homes for sale at any given time, a number that allows buyers and sellers equal negotiating power, the NAR said.

The inventory plunged to 1.6 months in January 2022 and stood at 2.6 months in March. 

The lack has driven buyers to newly constructed homes, a booming market that made up a third of home sales in March, instead of the usual 10 to 20 percent. (See “Sales of Newly Built Homes Surge” 9 May 2023.)

The new homes market sported a 7.6-months’ supply of houses in March, the U.S. commerce department said. 

The lack of existing homes for sale has kept home prices abnormally high, blunting the impact of the U.S. Federal Reserve’s strategy of using higher interest rates to lower inflation.

TREND FORECAST: As we wrote in the article cited above, the boom in new homes will be limited by the scarcity of available land on which to build, which we reported in “Median Home Sale Price Rises Despite Slowdown” (16 Aug 2022).

While new home sales grow, the supply of existing houses for sale will remain limited until the U.S. Federal Reserve holds its interest rate steady for at least two consecutive meetings. Should they raise them, it will make a bad situation much worse. 

When they lower interest rates, homeowners will be able to make firmer expectations about the future that will allow them to make decisions about whether to sell.

The housing market will continue to normalize, barring a recession, but it will do so slowly because of tightened credit standards and general jitters about the economic future. 

Average national sale prices will continue to soften, but not greatly. A recession will weaken them further, with the depth and duration of a recession determining how much further prices will fall. But as we have long forecast, minus a wild card, home prices will not dramatically decline.