Staying put: Keeping lower rate could stall market

Researchers at the Institute of Housing Studies at DePaul University say that interest rate lock-in may be more of an impediment to housing turnover than negative equity – those owners who can’t sell because they owe more than their home’s value.

The study assumed a 1 percent rate increase each year over a three-year period. It revealed that the number of households freed from negative equity by increasing home prices will not offset the number of homeowners who are increasingly being locked in by low interest rates.

At the end of the three-year period, the turnover rate in strong markets had decreased by 75 percent. The effect in weaker markets was slightly less extreme, but similar.

Lawrence Yun, National Association of Realtors’ chief economist, predicts that interest rates will increase from current levels (around 4.2 percent) to nearly 5 percent by early next year. He said they will probably rise until they reach 6 percent then stabilize. Historically, 6 percent interest isn’t deadly to the economy, but Yun said that a homeowner paying about half that may take rates into account when deciding whether or not to move.

“Some homeowners will delay moving into a new residence because of the desire to hold on to the current lower rate mortgage,” Yun said.

Analysts say a 1 percent increase in mortgage rate equates to a 10 percent reduction in purchasing power. A family looking to keep a mortgage payment below $1,500 a month will need to lower the maximum price they can pay for a house from $300,000 to $270,000 if interest rates go up one percentage point.