Homeowners Are Clinging to their Below-4% Mortgages for Dear Life as Mortgage Rates Went over 7%

The housing market, wrecked by ultralow mortgage rates, will stay wrecked for longer. By Wolf Richter for WOLF STREET. Mortgages with rates below 4% – primarily products of the period of maximum interest rate repression by the Fed in 2020-2022 – have tightened their grip on homeowners, as they face mortgage rates over 7% currently. Mortgages with rates below 3% edged down by just 10 basis points to a share of 19.2% of all mortgages outstanding in Q2. It took a whole year to trim the share by just 1 percentage point, from 20.2% in Q2 last year (red in the chart below). So that process has essentially stalled. The share of 3% to 3.99% mortgages edged down by just 20 basis points in Q2, to a share of 29.9% (blue), according to data by the Federal Housing Finance Agency. All types of mortgages are included, from 30-year fixed-rate mortgages, via 15-year fixed-rate mortgages, to Adjustable-Rate Mortgages. These ultra-low-rate mortgages have become a huge gift from the Fed. Homeowners might not move, when they would otherwise move, because they don’t want to replace that 3% mortgage with an over-7% mortgage, and so sales of existing homes have plunged by about 25% from pre-pandemic times and have remained at those levels for four years. From early 2020 through Q1 2022, the Fed had purchased trillions of dollars of mortgage-backed securities and Treasury securities with newly created money, and it cut its policy rates to near-0% and kept them there, all of it to impose all-out interest rate repression on the economy. This act pushed mortgage rates to historic lows, which created enormous demand for homes, which caused home prices to explode by about 50% in two years, and more in many markets. It caused other asset prices to explode as well, and it caused inflation to explode, eventually to over 8%, the worst inflation in 40 years, while mortgage rates were at 3% — so negative “real” mortgage rates. It triggered a tsunami of refinancing into these low-rate mortgages. And now, very understandably, homeowners are clinging to their low-interest-rate mortgages for dear life and have thereby put the housing market on ice. Life happens nevertheless – a job in a new city, death, divorce, more kids, nightmare neighbors, the need for a house without stairs, that sort of thing – and people sold their homes and paid off those mortgages since early 2022. But that process has come to a near-halt now, ensuring that the housing market will remain frozen. The 4.0% to 4.99% mortgages edged down by 10 basis points to a share of 16.5%, the lowest share in the FHFA’s data going back to 2013, and down from the peak in 2019 of 40%.Those mortgages are still attractive and worth clinging to, compared to today’s 7%-plus mortgages. The share of 5.0% to 5.99% mortgages increased to 12.0% of all mortgages outstanding in Q2, the highest since Q1 2020 (blue in the chart below). In Q2, there were still regular 15-year mortgages offered in this range, and some people chose them if they could afford the higher payment, because they would save a lot of interest over the life of the mortgage. But in recent weeks – which will show up in the Q3 data – regular 15-year mortgages moved into the 6%-plus category as mortgage rates have surged across the board. The share of 6%-plus mortgages rose to 22.5% of all mortgages outstanding, the highest since Q2 2015, up from a share of 7.3% in Q2 2022 (red in the chart). The bulk of mortgages originated currently fall into this category. Adjustable-Rate Mortgages remained unchanged at a share of 4.3% of all mortgages outstanding, down from over 10% at the beginning of the FHFA data in 2013. Some ARMs had rates below 3% even before 2020, and were included in the below-3% mortgages, which is one of the reasons the share of below-3% mortgages was above 0% even before 2020. Homeowners with ARMs that were originated when rates were ultra-low experienced payment shock when their mortgage rates adjusted to the higher current rates. But the share of ARMs outstanding is very low, and don’t affect enough people to pose a systemic issue. And home prices have soared in many markets since 2020, so if a borrower with an ARM gets payment shock and cannot make the payment, they can often sell the home, pay off the mortgage with the proceeds, and walk away with cash to re-figure things out. Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the mug to find out how: A $1,000, 30-year, 3% bond will drop to $550ish when rates rise to 7%. Can we apply similar math to the “value” of a million-dollar house bought with a 30-year, 3% mortgage that is now on the market in a 7% interest-rate environment? Exactly. People are holding onto assets that are losing value because they can afford the low monthly payment… You people that completely ignore the utility of a home as, uhh, I don’t know, a place to live, are hilarious. Exactly exactly. 20 years of ZIRP idiocy (2002-2022, with small pauses and big implosions) basically converted US home ownership into the equivalent of bond speculation on margin. The DCF dynamics are fairly close to being identical. Brought to you by the Fed. Of course, ZIRP (let’s just call it money printing because that is what made it possible) had the extra “benefit” for DC of funding/empowering the continuation of their multi-decade imbecilities. Does that bond have granite countertops, stainless steel appliances and an open floor plan? 😄 No…but it does have property taxes. Probably not because of cash buyers in the high end of housing. But in normal priced homes a haircut for sure but because of inflation with labor and materials. New built homes cost more keeping up values of existing homes from crashing. For now. “Data save” today with Labor participation rate increased saving the unemployment rate from going down and 10 year yield from rising. 5.15% closing yield is support and 5.34% is now inter day daily resistance. Looking forward to wolf’s take on labor participation later today. so here is what I told my son who would like to move up into better housing(ie 2nd home – he has 4% and $800 mortgage with lots equity) hunt for FHA/VA existing loans of for sale homes – approach seller with idea that you will assume LOAN – WHICH btw FHA/VA allow as long as you QUALIFY then you get to keep their 4% loan with less than 30 years left This is so delusional. I can’t believe people live this way. You should hunt for a house that fits your needs, budget, and will make you happy. You spend over half your life there. The bank is the bond holder and the one losing value in this situation, not the homeowner. Not quite, but you calculate what would require the same monthly payment at both interest rates. It turns out a 7% mortgage allows you to finance 2/3 what a 3% mortgage does at the same interest rate. Great repot, Wolf. I haven’t seen this type of analysis anywhere else. Kinda reminds me of that old bumper sticker – “the only way you’ll take my gun is to pry it from my cold, dead fingers.” Substitute the sub-4% mortgages for the gun. Who can blame the holders of those mortgages for keeping them? Anyone can use one of the online financial sites to calculate how much more they’d pay to switch to a current rate mortgage. A sobering difference – more than enough to make people tolerate a home that has some drawbacks for their current living situation. People will part with those mortgages only when they absolutely must – the life change must be severe. Not an inconvenience, but a structural life change. Cosmetic life changes (like their son Billy wants his own bedroom instead of sharing one with his brother) won’t do it in this environment. I suppose the Fed decision makers would argue they did not know at the time (2020 – 2022) how severe and long lasting the pandemic would be, and that repressing interest rates to that level helped many people keep their jobs through the pandemic period. What would the economy have done without that interest rate repression? Tough to call. The politicians were scared of seeing 1930’s style breadlines and taking blame. So, we get interventionist policies going all the way back to the GFC. The government picked winners and losers. Losers were anyone looking for a house. Winners were those that could refinance into a 2.75%. I bought a couple years ago at 6% something. My neighbor who’s been in his place 10 years is getting a new pool right now. Good for him, he won. Pool company gets paid. Good for them. But the idea that these decision-makers didn’t have a concept of the ramifications of these policies, that other decision-makers caused… Nah, come on. 90% of the readers of this site called what was coming. Wolf laid out multiple times how the housing market would break and it more or less did, just like he mentioned it would. If he can nail it, there’s no way in the world these policy makers didn’t know what was coming when they have the direct information and real-time data. They knew. Everything these guys touch turns to crap. The next ‘crises’ will be the same… Here comes some government entity (probably the FED) to lay a big turd. They get no credit whatsoever. Lol breadlines. They dont care about the poor. They care about tge people who really pay their salary, and that is the rich. Asset values will be protected at all costs. You give the ” decision-makers” too much credit. Just because they ended up in those positions, you assume that they are the best prepared, most educated, brightest minds in the nation. Have you ever considered that they might be below average intelligence? …. and they ended up there because of totally different reasons than their high IQ? Unrelated, but fitting if you extrapolate, here’s one of my favorite quotes: “Democracy is not the highest goal… because democracy basically means government by the people, of the people, for the people, but the people are retarded…” The issue is not the low rates, that made sense for a limit period of time, but how long they suppressed rates. Way longer than necessary. Not just hindsight, the economy was fine and they still kept ultra low rates. Yep. It looks like variable rate mortgages are also making a comeback. Where have we seen this before? Nothing new under the sun folks. They’ve been running at very low levels, see last chart. What’s a mortgage? Should I get one? Mort is derived from Latin, meaning “dead”. Gage is from Old French, meaning “pledge” i.e. “security”. In today’s modern world, people will be paying their debts until they are dead. If the market is efficient, the prices should quickly reduce to reflect the higher mortgage prices and reflect current affordability. This is probably just taking time and the market remains inefficient. But, over long-term the house prices will adjust. That has been the hope, I guess My wife and I are ignorant about investing, and just simple working class folks; I’m 79, and 100% service connected disabled Vietnam veteran; my wife is 72. We managed to buy a new one story, wheelchair friendly home in (Covid period) December 2000 on a 30 year, zero down, 100% assumable VA loan at 2.50% loan, that we did a one time (free for VA loans) adjustment down to 2.25%, a year later (without changing any other terms). We thought ahead to buy a floor plan with a ‘moter-in-law’ quarters so when I’m dead, she can rent that one bedroom small full bath living room to someone for income, or maybe free for a care giver. My thinking was when she is unable to live there, she can keep it as her income producing rental investment, or sell with the advantage of what is left of the assumable part of the mortgage. CURIOUS from you if we made good decisions? Thank you for your service. I served then too. Nice job on the house and financing. Good luck to you. I think the thing to watch will be how this adjusts as we start to get to the longer term averages. I think the stat is that it is about 8-10 years a homeowner keeps a mortgage, so if by 2028/2030 we still see these numbers stalled, then it’s very possible that the lock in effect is truly real. Things that prompted people to move on that timeline (outside of the sudden divorce, death, etc), like kids aging out of the house, retirement, big career jumps, and more, then it could be truly interesting times. I don’t disagree that the lock in effect is real, I’m just curious what will happen once we hit that more “natural” settling point. We’re seeing it happen now where supply of existing homes is already disappearing, but could it be removed for decades? Or does 10(ish) years finally give enough time that people still want to move, and they have enough equity built up and house prices move up more slowly, that what they can take away is able to make the new loan more reasonable? Or, is it that the government has gotten us so addicted to cheap money that mortgage rates will be back down to 4 or 5 percent again soon in the future anyways… Anecdotal, but I’ve seen a lot of major renovations over the past few years on my commute to work. I’m taking about adding a floor to a ranch and footprint additions. I wonder how much of this is influenced by people who have locked in those mortgage rates in the 2020 era. After outgrowing (either in family size or their wealth) the home they purchased five years ago, they looked around and saw the new mortgage rates and perhaps they decided that it is better to spend money to upgrade their existing home rather they buying and moving. This is happening quite a bit. We are at 2.75% with major equity in the home. After running the numbers in different ways, it was cheaper to get a home equity loan, spend all that to make the current home to our liking as opposed to selling and buying. This analysis has been happening since the dawn of home equity loans and HELOCs, but today the answer is pretty clear. The real losers are the MBS holders who bought the low interest mortgages and are stuck with low returns… Still investing in my money pit. I will likely never turn a profit, but at least it was a forced savings asset;-) Bingo. I explained this to my brother back in 2008-2011 when the recession was happening. He was doing math and comparing what happened leading up to the recession to his future if he bought a home. I showed him the real math and proved to him buying a depreciated house will be cheaper than renting. His argument was “a home is not an asset” and it told him I agree and that it’s a forced savings account. You will get some, most, or more of your money back depending on how long you keep it for and what the market is doing when you sell. People are going to have to realize that their home is not now worth what it was worth in 2020. Once they get that through their thick heads, things will “normalize” in the housing market. It WILL happen- demographics alone guarantee it will happen. Sorta reminds me of banks- these people are sitting on unrealized losses. At some point they will have to sell, and the loss becomes real, but as long as they did not buy at the peak they will still probably do OK. Those that bought at the peak, and who agreed to forgo inspections and other due diligence, are screwed. But that’s life. Howdy Prisoners ” I am from the Govern ment and here to help “. Hope you Youngins are learning….. Learn about HELOCs and Prosper. You will have to pull up your bra straps and take a chance. Good Luck. Looks like the government did help… About 30% of homeowners who were able to lock down once-in-a-lifetime interest rates on houses they otherwise wouldn’t have been able to afford. Sure, the rest of us are paying the price, but that’s no different than my taxes going to pay for someone’s Medicare. Reagan was an idiot. Let me know when his followers turn down social security, or FEMA disaster relief, or Federal deposit guarantees, or… The list goes on. Last I checked his presidential library is maintained by the government too, so even in death, Reagan hasn’t stopped suckling from those “dangerous” government officials trying to help him. 🤣 Need a tip jar for this. ^^^^ Agree, like totally dude or dudette with your ”Reagan was an idiot.” comment. This was SO obvious to anyone paying attention to his ordering of the helicopters to spray tear gas, possibly including Agent Orange onto thousands of law abiding folx in ”southside” area of Berkeley because a couple of other idiots, likely ”plants” were doing some damage in the streets south of the campus of CAL. Ray gun was governor of CA at the time, and clearly wanting to ”make his chops” as a so called conservative, but in fact, as SO many on BOTH SIDES, a reactionary. Until and unless USA VOTERS are sufficiently educated to understand the vast and continuing differences between conservatives and liberals and the reactionaries of right and left, WE the People will continue to get ”hosed” by both of those extreme folx as should be SO clearly obvious today. Home builders can not sell homes at these mortgage rates. But the demand for homes is still rising, so home rents go up and home prices do not decline. Interesting way to look at the problem! Homebuilders do a pretty good job selling homes in this environment by cutting prices, buying down mortgage rates, and throwing incentives into the mix, thereby gutting their gross margins, profits and stock prices. But they’re selling homes somewhere near pre-pandemic levels. They also have a lot of inventory for sale because they’re in the business of building homes, and so they will continue to be aggressive. Homeowners just haven’t figured it out yet. https://wolfstreet.com/2026/09/24/what-the-infamous-housing-shortage-looks-like-inventory-of-new-single-family-homes-balloons-sales-crawl-prices-sag/ All Govt was very afraid of total collapse during the GFC and Covid. Their responses were understandable for the events even though people trash them in hindsight. The real problem is the 30 year mortgage term allowing the lock in to even happen in the first place, not the fact that people took advantage of it. In Canada the usual term is 5 years. If you think rates will rise you can refi, but there is a penalty to do so which means you get the calculator out. Apparently there are terms up to 10 years, but I have never met anyone who had one. When I had a mortgage I usually did the 5 year term for the security of being able to budget. I would have taken a 30….maybe? Not in the 80s :-) Shorter terms allow the housing market to adapt faster to interest rate changes. There are fewer lottery winners. Fewer stay puts. Having said that we have done well in my lifetime owning a home, mostly because of sweat equity and renovations. (Carpenter). It set us up to retire early as I have had no mortgage payment after age 45. In BC housing prices are still high but mostly because people choose to live here. Location location. This is especially true on Vancouver Island. And employment forecasts are beyond positive. Squamish LNG plant currently under construction, Kitimat LNG expansion with German investment and First Nations ownership stake was announced just this past Monday….making it the 2nd largest LNG plant in the World. (Asia Market) And, a new west coast oil pipeline is now set to begin construction within a year as it has just received the designation of National Priority. This additional oil will also go to Asia as opposed through the US. Housing prices will remain high here as a result. Most of this construction work are camp jobs, huge wages but families stay there they are. More projects on the way with European, Asian, and Indian investors. GTA here. I had a 10Y fixed on my first home (2003-2013) probably in hindsight I should have went variable. Home prices in the GTA were just coming out of the bottoming process of the late 90’s so my mortgage was small (~$250K) relative to mortgages now. Back then a 3300 sq foot house in Mississauga was ~$450K! What a time. Those people that took on ~$800K+ mortgages the past 8-10 years are playing with fire especially now with renewals coming in. Seems our banks are extending the amortization periods — lots of people are just paying expensive rent to the bank to pretend they own it. Unfortunately a lot of people swapped back into variable on this last renewal cycle when they should have been going into 3-5Y fixed if the rate was <4%. Just sold my house in Hawaii that had a 2.5% conventional. There’s more to life than money. Had to transfer for work and did the landlord thing. Hated it even though I had great tenants. Sold the house and in escrow on a new house with a 6.8% rate. I can afford it so who cares. You get one life to live and I feel sorry for all those people living in houses that no longer fit their need simply because they don’t want to lose a good rate. “The share of 6%-plus mortgages rose to 22.5% of all mortgages outstanding” phheeewww that surprises me its that high. You’ll need to make 72% gain on price to break even at 6% rate. Thats not accounting for every other expense it has. In 30 years though with the way inflation is going? Maybe