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The recent surge in mortgage rates has created what’s being called the “golden handcuff effect” for homeowners. Like financial incentives employers offer to keep employees from leaving, low mortgage rates have made many homeowners feel “locked in” to their existing homes.

 

During the pandemic, record-low rates prompted homeowners to refinance or move, resulting in most homeowners now having mortgages with interest rates below 4% or even 3%. A recent survey by Realtor.com found that about 82% of home shoppers feel constrained by their current low-rate mortgages.

 

This situation has led to a critical shortage of homes for sale, with new listings running nearly 20% behind last year’s pace. The average rate for a 30-year fixed-rate mortgage currently sits around 7%, up from 2.93% in January 2021, according to Bankrate.com.

 

The tipping point for many homeowners to consider selling is when mortgage rates hit 5% or higher. However, around 80% of mortgage holders currently have rates below 5%, which means there is likely to be a flood of housing inventory sometime soon.

 

Greg McBride, Bankrate’s chief financial analyst, believes that mortgage rates will remain high until inflation decreases significantly. The need for more homes for sale puts pressure on prices, dampening affordability for prospective buyers.

 

While we may be in uncharted territory with today’s market conditions, historical trends suggest that the housing market will eventually reoccur, particularly if mortgage rates start to fall. Although sub-3% rates may not return anytime soon, the prospect of lower rates could reinvigorate the housing market.