Let’s dive into the world of mortgages and how interest rates play a role in the housing market. Since 2018, most homeowners have refinanced their mortgages to take advantage of lower rates. In fact, over 90% of American mortgages have an interest rate below 5%. So, if you’re worried about the housing market crashing due to rising mortgage rates, don’t be. Around 40% of homeowners don’t even have a mortgage, and most of the rest aren’t bothered by rising rates because their monthly payments stay the same.
Only a small fraction of homeowners, about 5%, have an adjustable-rate mortgage (ARM). This number is slowly creeping up to 10% due to rising mortgage rates. If you’re an ARM holder, you might be feeling a bit anxious. But don’t worry, by the time your fixed-rate period ends, mortgage rates will likely have dropped again.
Let’s break down the percentage of mortgages at different interest rates. The majority of mortgage holders have rates below 4%. Here’s a more detailed breakdown:
- Below 2%: 0.53%
- 2% – 2.5%: 8.8%
- 2.5% – 3%: 24.5%
- 3% – 3.5%: 21.1%
- 3.5% – 4%: 17.7%
- 4% – 4.5%: 11%
- 4.5% – 5%: 6.7%
- 5% – 5.5%: 2.8%
- 5.5% – 6%: 2%
- 6% – 6.5%: 1.9%
- Above 6.5%: 2.9%
Interestingly, about 40% of Americans own their homes outright, with no mortgage.
Now, let’s talk about homeownership tenure, which is the length of time someone owns their home. As mortgage rates rise, people are likely to hold onto their homes longer to keep their low fixed-rate mortgages. The average homeownership tenure has been increasing and is expected to continue to do so.
The value of owning a home has increased as more people work from home and recognize the benefits of real estate for wealth creation, passive income, retirement income, and stability. As a result, more capital will be invested in real estate over time.
The average homeownership tenure in the U.S. was about eight years in 2020, but it’s expected to rise to about 12 years in 2024. In major cities, the tenure ranges from 6.9 years in Atlanta to 14 years in cities like Los Angeles, San Francisco, and San Diego.
With rising mortgage rates, homeowners are likely to stay put longer. If you’re a homeowner, you might decide to wait until rates drop before moving to a bigger house. Or, you might use this opportunity to look for better deals.
The low supply of homes is one reason why home prices are expected to rise by 4.5% in 2024. Even though higher mortgage rates make homes less affordable, the low supply will likely keep prices high.
According to a recent survey, 92% of homeowners say their current home is affordable. As a result, only the most financially secure homeowners or those who absolutely need to move will likely do so in this higher interest rate environment.
If you have the financial means, consider looking for bargains and renting out your low mortgage rate house. Rents are strong, so you might want to take advantage of the market.
Investing in real estate can be a powerful way to build wealth. In 2016, I started diversifying into heartland real estate to take advantage of lower valuations and higher cap rates. I did this by investing with real estate crowdfunding platforms.
There are several platforms available for investing in real estate. Fundrise is a platform for all investors to diversify into real estate through private funds. They primarily invest in residential and industrial properties in the Sunbelt, where valuations are cheaper and yields are higher.
CrowdStreet is a platform for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. These are secondary cities with lower valuations, higher rental yields, and higher growth potential.
Both platforms are great ways to diversify your real estate portfolio. However, before investing in each deal, make sure to do extensive due diligence on each sponsor. Understanding each sponsor’s track record and experience is vital.
So, there you have it. A deep dive into the world of mortgages, interest rates, and homeownership tenure. Whether you’re a homeowner or looking to invest in real estate, understanding these factors can help you make informed decisions.
