Rising mortgage rates and lack of supply are boosting homeowner tenure – which is the number of years a homeowner lives in a home before selling and moving – according to a recent analysis by Mark Fleming, chief economist for First American Financial Corp.
It’s a vicious cycle: Homeowners who are currently locked into lower mortgage rates are reluctant to sell and move to another home because it often means they will need to lock into a higher interest mortgage. As such, rising mortgage rates serve as a disincentive to moving.
This reluctance to sell, in turn, further constrains supply – if fewer homeowners are willing to sell, then there are simply fewer homes available on the market.
And as we have seen, home builders are currently failing to keep up with demand in most markets.
Prior to 2007, the average homeowner tenure was around four years, Fleming says in the report. But in the aftermath of the financial crisis that began in 2008, average tenure jumped significantly to seven years and remained at that level through 2016.
During the past year, homeowner tenure increased by another 10%, Fleming says.
So why is tenure length increasing? Fleming says it comes down to five basic factors: Rising mortgage rates, lack of supply, tight credit standards, low foreclosure rates and increased home equity.
In addition to rising mortgage rates and lack of supply keeping borrowers in their homes longer, tighter lending standards have made it more difficult for borrowers to qualify for a mortgage.
“Because a homeowner’s decision to sell is driven by their decision and ability to buy, tighter credit standards increase tenure length,” Fleming writes in the report. “When homeowners are less likely to receive mortgages for a new home, they are more likely to stay in their current home.”
The currently super-low foreclosure rate also has some effect: When the foreclosure rate falls, there is less foreclosure inventory in the pipeline, which, in turn impacts supply.
Home equity is also a factor when looking at homeowner tenure: Although home equity has been rising on a national level, there are still many markets across the country where home prices still have not returned to pre-criss levels, which means there are still millions of Americans who are either “underwater” on their mortgage or close to it. Very often, homeowners seek to build equity in their current home before considering moving to a new one. As such, they are “equity locked-in” to their home.
“The increase in homeowner tenure explains why housing supply is tight and is currently one of the main drivers of low existing home sales,” Fleming says in the report. “It’s hard to buy what’s not for sale.”
A major factor that could reverse the trend and result in increasing supply is the fact that the Baby Boomer generation is expected to eventually “age out of homeownership,” Fleming says.
“More than half of all existing-homes are owned by baby boomers and the silent generation, who will eventually age out of homeownership,” he says. “When that occurs, the problem may not be a lack of supply, but the exact opposite.”