Low-Rate Mortgages Form ‘Golden Handcuffs’ Around Homeowners

The silver tsunami, or the expected increase of homes on the market as baby boomers downsize, could be slowed by golden handcuffs.

The New York Times reported on Monday that by the end of last year, there was more than a 3% gap between rates on new home loans and the average fixed rate on existing mortgages.

About 70% of homeowners had mortgage rates of around 4%, according to The Times, which is significantly lower than the current market rate of about 7%.

Related: A ‘Silver Tsunami’ Is About to Upend the Housing Market, Says Analyst Who Accurately Predicted the 2008 Financial Crisis

The gap between the current rate and the average incentivizes homeowners to hold on to their properties, locking them in with “golden handcuffs” or a financial reason to stay.

The effect is noticeable: The Federal Housing Finance Agency found that the mortgage rate lock-in stopped 1.33 million home sales from happening from mid-2022 to the end of 2023, reducing home sales by 57%. The shortage of supply, combined with population growth outpacing construction, has led to a 7.2 million home shortage, per Realtor estimates.

Boomers, who were expected to start downsizing their living spaces as early as this year and flood the housing market with homes in a silver tsunami, are instead holding onto their larger residences.

“We just don’t want to pay that much in interest,” finance professor Bob Wood, 66, told CNBC. Wood and his wife are in the 10th year of a 3.125% 15-year fixed mortgage on their 5,000-square-foot Alabama home.

Another couple, both over 70 years of age and empty nesters, told CNN Business that they’re “staying put” in their 3,000 square-foot, 5-bedroom California home.

Related: Barbara Corcoran Says ‘Now Is the Best Time’ to Buy as Home Prices Will Soon Go ‘Through the Roof

A Realtor survey from last year showed that 82% of homeowners who wanted to sell their existing home and buy a new one felt locked into keeping their homes because of the difference in mortgage rates. More than half said they were waiting for rates to come down before selling.

“One positive aspect that came out of the pandemic was historically low mortgage rates – and many people took advantage of this opportunity to buy their first home, upgrade to a more expensive home, or refinance the home they were in,” said Realtor Chief Economist Danielle Hale in the report. “Unfortunately, this comes with a bit of a catch-22, as homeowners who locked in a 30-year fixed rate in the 2-3% range don’t necessarily want to give that up in exchange for a rate in the 6-7% range.”

The locked-in homeowners were also less willing to relocate for work, with Bloomberg highlighting last week that manager recruits based in the Midwest were turning down jobs in the South with salaries of $250,000, in part to hold on to their low-interest mortgages.

Related: Barbara Corcoran Sounds Off on NAR Settlement: ‘It’s a Scary Time for Real Estate Agents’

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