In our last post, we talked about how mortgage rates have recently fallen below 4% (for loans of at least $484,000), and that this drop in rates have led to a significant increase in refinance loans among homeowners. We also briefly referenced the fact that these relatively low mortgage rates haven’t led to a significant increase in home purchases. But, we didn’t really dive deeply into the reasons underlying this other trend. Upon cursory inspection, many people would assume that falling mortgage rates would lead to an increase in home purchases. Lower rates translate to lower monthly payments, which would seem to make a purchase a more attractive opportunity. But this hasn’t really happened. Why?
In this post, we will briefly go over the reasons as to why falling mortgage rates haven’t led to big increases in home buying.
Mortgage Rates Falling but House Prices Rising
Today, national unemployment is seemingly low, and so many Americans who don’t currently own appear to be in a good position to enter the buying market. Why isn’t this happening? For one thing, earnings haven’t kept pace with house prices. Simply put, houses have become too expensive. Prices have continued to rise even though wages have remained stagnant. Normally, prices fall in response to declining demand, but house prices have kept rising even though demand has levelled off in many places. The result is that buyers can’t enter the market.
What might help correct this is an increase in supply, but unfortunately a significant increase in supply doesn’t seem likely in the immediate future. A shortage of construction workers, slowness in the issuance of housing permits, and a multitude of other factors have contributed an undersupply of housing, and these factors are likely to remain in place for at least awhile.
Another thing which may be contributing to the low growth of home purchases is the removal of certain tax breaks in the recent tax law update. The tax reform by Trump in 2017 capped state and local tax deductions to $10,000, and deductible mortgage interest was limited to loans of $750,000. We don’t know yet how much these changes have impacted home buying trends, but they most likely haven’t pushed things upward.
The fact that we’ve seen refinance loans skyrocket recently can be seen as a positive development in one sense, but in another sense it may be worrying. On the one hand, it’s good to see homeowners capitalize on lower rates and save themselves money, but this also may mean that homeownership is becoming less accessible. If people refinance, they’re signaling that they intend to remain in their homes for the foreseeable future, which means they’re not intending to sell and buy new ones. We may be on the cusp of a kind of revolution in our way of thinking about homeownership. Given the circumstances of millennials, combined with the conditions of the market, perhaps we may be entering an era in which homeownership won’t be a default aspiration of everyone. We will just have to wait and find out.
Image credit: Pictures of Money