Really low mortgage rates may be limiting mobility

Here is how low mortgage interest rates may be restricting the mobility of lots of homeowners:

But what does the uptick mean for those homeowners who did take advantage of ultralow rates? According to researchers at DePaul University’s Institute for Housing Studies, it has created a new population of homeowners who are seemingly stuck in their homes.The housing crisis created a large class of people who couldn’t sell their homes because they were underwater, owing more on the mortgages than the properties were worth. But in addition, another class of homeowner has formed, those who took advantage of the low rates and would have to give them up if they sell their homes.

Compounding the increase in interest rates is that the home price gains seen in Chicago and other markets last year are moderating. As a result, homeowners who refinanced, and those who bought homes at the low rates, could see smaller home price appreciation going forward. Yet even if they buy a house for the same price as the one they are selling, it will cost them more because of the higher interest rates. That scenario could affect their mobility and, as a result, the overall number of homes that change hands, the study concluded.

Similar scenarios have played out in the past, according to the researchers, who noted that the average monthly rate for a 30-year, fixed-rate mortgage rose from 10.1 percent in November 1978 to 17.8 percent in November 1981. An earlier study of that period found that every 2 percentage-point increase in rates lowered household mobility by 15 percent.

Generally, lower rates are seen as good things for homebuyers as it gives them more purchasing power. However, if rates then go back up, having a lower interest rate may not help in the step up to the next more expensive house. It will take some time for the market to balance out. Although it is unlikely there will be such a swing like in the late 1970s/early 1980s, the housing market is still quite delicate in many places and even small changes could lead to bigger disruptions.

All that said, higher rates of mobility are assumed in the United States. In order to have a thriving economy, workers need to be able to move to where they can find economic opportunities and moving up the ladder of houses (starter home, family home, retirement home, etc.) keeps the housing industry going.

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