The law firm of Goodrich & Reely, PLLC, serves clients throughout Montana.

Inflation, interest rates and ‘mortgage lock-in’

On Behalf of | Aug 30, 2023 | Real Estate

Analysts have noted a curious phenomenon affecting the housing market here in Montana and across the United States: While the housing market has cooled, prices haven’t dropped very much. Ordinarily, when there aren’t as many homes changing hands, sellers start to lower their asking prices, but so far it seems sellers today are slow to do that.

The big reason behind this phenomenon appears to be interest rates.

Interest rates and inflation

Most homebuyers finance their purchases through a 30-year mortgage with a fixed interest rate. Lenders set these interest rates based on the Federal Reserve’s prime interest rate.

For many years, the Federal Reserve kept the prime interest rate low as a way of encouraging consumer spending, but in recent years it became concerned that low interest rates were leading to inflation, and so it began steadily raising its rate. As a result, mortgage interest rates are at 7% or higher — the highest they have been in 22 years.

The rate hikes appear to be working as intended. Inflation has slowed. However, Federal Reserve Chairman Jared Powell said recently that he thinks inflation is still too high and the Federal Reserve may continue to raise rates in the near future.

Mortgage lock-in

All this high-level macroeconomic machination may seem distant and abstract, but it has very practical effects for homeowners and homebuyers.

Property owners who bought their first “starter” homes around eight years ago, when interest rates were at historic lows, are now in a bit of a bind. Even though their houses have appreciated in value over the past decade, the higher interest rates have made buying a new home more expensive. They will have to sell a house they bought at a low rate and buy one at a much higher rate.

Many of these homeowners are staying where they are, rather than putting their houses on the market and buying new homes. This reduces the overall stock of available “starter” homes, making it harder for first-time buyers to enter the market.

This situation has a lot of effects that probably weren’t intended by the Federal Reserve: Homeowners who might have moved to a new town for a better job now feel like they can’t afford to leave. Prospective homebuyers now find they are temporarily shut out from the wealth-building effects of home ownership.

Legal issues

So far in this blog post, we have been discussing economic matters involved in real estate, but there are legal matters as well. The residential real estate business has a unique blend of legal, economic and sentimental issues. it’s important for owners, buyers and sellers to understand their legal rights.