Real estate’s new normal: Homeowners are staying put
For much of last year, Greg Rubin was looking to buy a bigger house. He has been in the same two-bedroom home for 17 years and hoped to upgrade to a place with a guest room, a home office and a workshop for his guitars, radio-controlled planes and gardening equipment.
This year, Rubin has a new plan. He stopped looking and embarked on an ambitious renovation project that will begin with a new kitchen and end with a workshop for all the man toys.
“My girlfriend would like to get a larger house, but right now, I’m staying put,” said Rubin, who lives in Escondido, Calif., and owns a landscaping firm.
Rubin is the face of what appears to be a new normal in the real estate business: Homeowners are moving less, creating a drag on the economy, fewer commissions for real estate brokers and a brutally competitive market for first-time home shoppers who cannot find much for sale and are likely to be disappointed by real estate’s spring selling season.
Recession’s aftermath
For many homeowners, the desire to stay put began out of caution or necessity. Rubin’s business lost more than half its revenue in the years after the Great Recession, so until recently, he had no money or desire to upgrade. Millions of other homeowners lost their jobs or were stuck in homes worth less than they owed the bank — two big reasons that the median homeowner tenure rose to about 8½ years last year, up from about 3½ in 2008, according to data from Moody’s Analytics and First American Financial Corp. That is the longest tenure since their data began in 2000.
But even though the economy and the housing market have improved — unemployment is below 5 percent, and steadily rising home prices have freed millions of people from the scourge of “underwater” mortgages — economists expect elevated homeowner tenure to continue for the next decade or even longer. That is because the better economy has come with a steady rise in interest rates.
Like tens of millions of others, Rubin refinanced when mortgage rates were near a historic low. He has a 3.25 percent interest rate on his home loan, so even if he could find a similar home for the same price, his payment would go up considerably. For a 30year fixed-rate $500,000 mortgage, an interest-rate rise to 5.5 percent would increase the monthly payment roughly $700 to $3,600, including estimated taxes and fees, according to Zillow, the real estate data service.
Rates for 30-year fixed mortgages were at 4.05 percent last week, after being under 3.5 percent as recently as October, according to Freddie Mac, the mortgage finance giant. And with the Federal Reserve signaling further rate increases, economists expect mortgage rates to head toward 5 percent by the end of the year. The higher that rates climb, the more tempting it becomes for people to stay in place.
“Once mortgage rates climb to 5 or 5.5 percent, we are going to start to see the lock-in effect really take hold,” said Svenja Gudell, economist at Zillow.
Single-family home starts, which were at a 821,000 annual rate in March, are about half what they were before the recession. Existing-home sales are about one-fourth below their pre-recession high. This is despite years of population growth and the movement of millennials, now the United States’ largest generation, into adulthood and the workforce.
‘Deep, dark hole’
“We are coming out of deep, dark hole called the housing bust, but we are a long way from normal, and we may never get back to normal, if normal was the average person stayed in their home for four or five years,” said Mark Zandi, chief economist of Moody’s Analytics. “We’re at eightplus now, and even under the best of circumstances, maybe we get to six.”
Interest rate “lock-in” is expected to be most pronounced in desirable cities with a high rate of job growth as well as higher-income neighborhoods, according to a 2014 study by DePaul University. That is because credit standards went way up after the recession, so most of the people who refinanced when rates were rock bottom tended to have better credit, bigger paychecks and homes in pricier neighborhoods.
Still, the effect will be felt throughout the economy. Whether in broker commissions, new furniture or junk hauling, moving costs a lot of money, so longer home tenures are likely to weigh on consumer spending.
It could also hurt the economy in more subtle ways, by making people less mobile. For instance, some people might find a better job in another city but decide not to take it because the pay would not make up for the increase in mortgage costs.