Millions of US homeowners locked-in to low mortgage rates are reluctant to sell and purchase homes at current higher interest rates, leading to decline in housing sales, challenging housing market recovery, finds study by DePaul University in Chicago
February 26, 2014
– Millions of households that purchased a home or refinanced their mortgages during the last four years when interest rates were at historic lows may find themselves locked-in to those mortgages — and unwilling or unable to sell, thereby challenging a housing market recovery — if long-term interest rates were to rise quickly in the coming years, according to research from the Institute for Housing Studies at DePaul University. Increases in mortgage rates are expected due to continued pullback in the Federal Reserve’s quantitative easing policy, the study’s authors note.
“This research shows that locked-in households will be reluctant to sell their homes and finance other purchases at higher interest rates,” said Patric H. Hendershott, an author of the study and senior research fellow at the institute. “This threatens an already delicate housing and economic recovery.”
These findings are summarized in a research brief, “The Impact of Lock-In Effects on Housing Turnover and Implications for a Housing Recovery,” released Feb. 26 by the institute. The research finds the decline in housing sales will be greatest in the strongest housing markets, which suffered the least price decline during the recent housing bubble and have led the recent recovery in house prices. Households in these areas were most able to refinance their mortgages to take advantage of historically low interest rates.
Further, the research shows that as the numbers of interest-rate locked-in households grow, there would remain a large number of homeowners who are locked-in to their homes due to negative equity. This combination of interest-rate and equity locked-in households represents a challenge to the housing market and economic recovery in coming years.
Additional key findings of the research include:
• A 10 percent increase in the number of interest-rate locked-in households would lower housing turnover by 29 percent.
• A three-point increase in interest rates over three years would increase the number of interest-rate locked-in homes in strong submarkets by 35 percentage points.
• In response to this three-point rate increase, the housing turnover rate in strong markets would fall by 75 percent.
A steady rate of housing turnover, or sales activity, is essential to a healthy housing market and local economy because it spurs consumer spending, makes less-expensive starter homes available to new homebuyers as existing owners trade-up and enables the local labor market to function most efficiently by allowing households to be mobile.
The institute researchers analyzed the impact of locked-in households on housing turnover, or property sales activity, in Cook County, Illinois, home to the city of Chicago and one of the country’s largest and most diverse urban housing markets.
The researchers developed a scenario meant to simulate the unwinding of the Federal Reserve’s quantitative easing policy in the coming years. In this scenario, there was a single 10 percent increase in house prices followed by three annual percentage point increases in mortgage rates. Results of this simulation found that while rising house prices unlocked some underwater households, it was not enough to offset the increase in interest-rate locked-in households.
In addition to Hendershott, other authors include Jin Man Lee, the institute’s research director, and James D. Shilling, professor and the Michael J. Horne Chair in Real Estate Studies at DePaul’s Driehaus College of Business.
The Institute for Housing Studies is a research center based at DePaul University that provides analysis and data to inform housing policy and practice. The working paper, “The 2005-11 Housing Boom and Bust: Impacts on Housing Turnover and Implications for Recovery,” contains detailed methodology and findings. The research brief, “The Impact of Lock-In Effects on Housing Turnover and Implications for Housing Recovery,” summarizes these findings. Both are available to download at www.housingstudies.org.
The working paper and research brief are available online at: http://bit.ly/1fHf2Dc.