Could low rates be an incentive for upward-bound homeowners?

by Kimberly Greene31 May 2019

Sustained low interest rates are tempting homeowners to move into bigger homes—with larger mortgages—instead of staying put and refinancing their current property.

Lower borrowing costs means that buyers are able to afford bigger mortgages. This is attractive to homeowners looking to free themselves from their starter homes, as their choices in that next price bracket are increasing and they can use their profits from the sale of their current home toward the down payment on a new one.

The average rate for a 30-year mortgage dropped for a fifth straight week to 3.99%, which is the lowest it’s been since January 2018.

The average loan size, however, increased to $331,000, which is up four percent from a year earlier, and climbed as much as nine percent during one week in April, according to data from the Mortgage Bankers Association. This is just five months after the 30-year rate was almost a percentage point higher and mortgage loan sizes were on a downward trajectory.

This motivation for current homeowners to move up is an example of how falling rates can help loosen up a tight market on multiple levels. When rates rise, homeowners are more likely to stay put because they don’t want to take on bigger mortgages. When rates go down as they have been, they have more options, and that could trickle down and free up inventory at the bottom of the housing market.

For potential buyers looking to break into the market, however, low rates mean that more people are getting themselves in a mortgage-ready position, and that could make competition even tighter than it is today.

 “There’s a little more inventory on the market, and that’s freeing up the logjam a little,” Michael Fratantoni, chief economist of the bankers group, told Bloomberg. “But the entry level is still extraordinarily tight.”

Leonard Kiefer, deputy chief economist at Freddie Mac, told Bloomberg that interest rates would help buyers who were higher on the property ladder because they were more sensitive to interest rates than their entry-level counterparts.

Looking at the move-up level, though, things aren’t flowing as smoothly as previously estimated. Contract signings for previously-owned homes declined 1.5% in April, after a nearly four percent increase in March. Previous data showed that sales of both new and existing homes fell in April while single-family housing permits dropped to the lowest level in almost two years.

For homes priced less than $250,000, deals fell three percent in April, but they were up seven percent for homes priced up to $1 million, said Lawrence Yun, chief economist of the National Association of Realtors.