It’s hard to find a For Sale sign on a neighbor’s lawn lately and it is showing up in the housing data across many parts of the country. In fact, existing-home sales in the U.S. fell for the twelfth straight month in January.
This drop in existing home sales and inventories makes complete sense when you look at a couple of data points: mortgage rates and treasury bond yields. First, there are fewer buyers out there who can afford to buy a house due to the relatively high mortgage rates, compared to the last decade or so. But the real reason for the drop in sales and inventories is on the selling side of the equation.
Existing homeowners either own their home outright or they have a mortgage with a rate in the 2 to 3 percent range when they bought their home or refinanced their mortgage in 2020-2021. So, for them to sell and buy another home with a 30 year mortgage rate that’s running over 7%, their monthly housing payments would jump considerably. Who is going to do that if they don’t have to move?
Plus, these homeowners can make some risk-free money from their current housing situation. This is where treasury bond yields come into play. For example, say a homeowner has a $250,000 mortgage at 3% and has $250,000 in cash available to invest. Instead of paying off the mortgage, they can invest in virtually risk-free treasuries or CDs and get over 5% interest annually. That difference in the mortgage rate and bond yields, in this case, 2% or $5,000 annually that they’ll be able to keep in their pockets, is a great way to take advantage of the current high interest rate environment.
This is an illustration of the types of scenarios that are going to keep existing home inventories suppressed until interest rates start falling again.
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Joe Baker, CFP®
Baker Asset Management, LLC
