Why Housing Will NOT Crash
Real estate sales transactions took a 22.6% YOY dive in February.
However, this doesn’t necessarily mean that the market will be flooded with inventory.
Two factors are limiting housing inventory growth:
- Lagging new housing construction
- Homeowners with locked-in low interest rate mortgages
New housing construction has lagged for a decade and slowed down significantly since 2020. I will discuss this issue in another article.
The bigger problem is that 99% of homeowners have a mortgage rate of less than 6%.
Among them, 72% have rates below 4% and 28% have rates below 3%.
Although current mortgage rates have decreased from recent highs, they are still above 6%.
Homeowners with a 4% rate or lower would have to pay significantly more each month if they buy a new home.
This is causing homeowners to either stay in their current home or rent it out instead of selling.
So if you took on a $700,000 mortgage with a 7% rate, your total monthly payment would be $4,657. But with the same size loan at a 4% rate, your monthly payment would be $3,342. Let’s say it’s a 3% rate with the same size loan, your monthly payment would be $2,951. It’s the golden-handcuffs of mortgage rates, and it’s keeping homeowners with low rates from selling and turning some into landlords.
With strong rent demand and low interest rates locked in for 30 years, most homeowners can rent out their homes for positive cash flow instead of selling them:
Michael Zuber, author of One Rental at a Time and former tech worker turned real estate investor, told Fortune that a 30-year fixed mortgage at a rate of 3% is without question one of the best assets most homeowners will ever have.
"They shouldn’t sell, they should rent it out," Zuber said, adding that several people on Twitter have told him they’re making around $1,000 a month after expenses from doing exactly that, sarcastically adding that the prospect of that "doesn’t suck."
With strong rent demand and low interest rates locked in for 30 years, most homeowners can rent out their homes for positive cash flow instead of selling them.
This will likely be a persistent issue in the housing market as long as mortgage rates remain above 6%.
In other words, it may take several decades before most of these homes hit the market again.
Originally Posted on InvestedX.
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