More homeowners are staying in their homes longer than ever before, locked in to historically low mortgage rates that may be financially imprisoning homeowners who can’t afford to move up to another home despite rising equity in their current home.
Instead of following the American ideal of staying in a home for a few years before upgrading to something better, more homeowners are choosing to stay put longer than ever before and are improving their homes instead.
Not selling their homes is limiting supply for first-time homebuyers and slowing home sales, says Mark Fleming, chief economist for First American, which in October released a report showing that the median tenure for homeownership has jumped to 10 years, up 10 percent from 2017.
Just before the housing downturn in 2007, homeowners typically stayed in their home for four years. After the housing crash of 2008-16, it was seven years, partly because many mortgages were underwater, with owners owing more than their home was worth.
‘Rate lock-in effect’
Rising home prices have given many homeowners enough equity to sell their homes at a profit, Fleming said in a statement. But low interest rates have created a “rate lock-in effect” that keeps homeowners put as rates rise, he says.
Mortgage rates have been increasing for the past year and are expected to continue to rise to an average of 5 percent in 2019, Fleming says. The last time a 30-year, fixed-rate mortgage was 5 percent was in 2009, he says.
“Homeowners with mortgage rates below the current rate may be reluctant to give them up for a higher rate, a phenomenon known as the ‘rate lock-in effect,’” Fleming said in a statement. “There is less incentive to sell your home if borrowing the same amount from the bank at today’s rates will be more expensive than your existing mortgage payment.
“As rates rise, many existing homeowners are increasingly financially imprisoned in their own home by their historically low mortgage rate.”
More HELOCs expected
With higher equity in their homes and locked into a low mortgage, more homeowners will choose to stay in their homes and update them with home equity lines of credit, or HELOCs, Fleming told Housing Wire.
“I think that HELOC loan demand will increase,” he said. “The higher mortgage rates go, the larger the financial penalty for moving, and the greater the incentive to renovate with a HELOC loan instead.”
A HELOC is a second mortgage against your home that is used like a credit card to borrow money as you wish. You only pay interest on the amount you withdraw.
An October survey by Open Listings found that if respondents had $10,000 to allocate toward housing, 73 percent would use it for current home renovations and the rest would put it toward a down payment on their next home.
The number of HELOCs grew 2.3 percent to 1.2 million from 2016 to 2017, with an estimated 70 million homeowners likely qualifying for a home equity product, according to a study by TransUnion.
“There are ample signs that the home equity lending market is poised for growth,” said Joe Mellman, senior vice president and mortgage business leader at TransUnion. “Home prices have surpassed 2005 boom levels and household home equity has grown even faster.”
Various reasons to stay
The $18,000 in a real estate agent’s commission that Tom Nathaniel and his wife would pay to sell their home was enough to convince them to spend $20,000 from a HELOC renovating their home instead of moving up.
“Since we loved our neighborhood, we figured it would be better to just take those fees and just improve,” he says. “We didn’t want to take the gamble on a new neighborhood, even if we found our dream home since our current neighbors and the amenities are just too good.”
They extended their pool patio, installed new flooring, painted, got new appliances and more, he says.
For millennials, the desire to travel and enjoy experiences outweigh the benefits of moving up to a bigger and more expensive home, says Eric Sztanyo, a real estate agent at Keller Williams Advisors Realty in Cincinnati, Ohio, and founder of We Buy NKY Houses in Cincinnati and Northern Kentucky.
While the boomers may have been all about the larger home with the picket fence, millennials have a much stronger bent toward minimalism,” Sztanyo says. “Overall, they invest in education, experiences and entertainment. This means they will sacrifice their square footage of it means a trip to Thailand or one more concert to attend.”
“Have low interest rates played a part? I”m sure they have as well since homeowners have enjoyed relatively historic low rates in their home purchasing,” he says. “However, rates have stayed fairly low and so I don’t believe they have been a hindrance for moving up into a larger home.”
Millennials are least likely to define homeownership as permanent, with 11 percent planning to upgrade to a better home, compared to 37 percent of seniors and 29 percent of baby boomers, according to a study by Nationwide Mortgages. Millennials plan to keep a house an average of six years before selling, compared to 10 years for all other buyers, the study found.