Let's take a look at the latest mortgages by interest rate. By understanding the composition of mortgages, we're better able to understand how a rise in interest rates will affect the housing market and the consumer.
Since November 2018, the vast majority of homeowners with a mortgage have refinanced and taken advantage of lower rates. I've drummed this refinancing message since 2009.
In fact, 90%+ of mortgages in America carry an interest rate of less than 5%. Therefore, anybody who is worried about a housing market collapse due to higher mortgage rates shouldn't be.
Most existing homeowners don't care that mortgage interest rates are trending higher because their monthly mortgage payments remain unchanged.
Further, unless mortgage holders with mortgage rates over 5% are struggling financially, they likely also don't care either. For if they cared, they would have already refinanced to a much lower rate!
ARMs Are A Small Percentage Of Mortgages
Only about 5% of homeowners with mortgages have an adjustable-rate mortgage as we learned in a previous post. Therefore, this means that 95% of homeowners with 30-year fixed and 15-year fixed mortgages are also unaffected. Just know the percentage of mortgages with ARMs is increasing. The percentage is now closer to 10% given the rise in mortgage rates.
If you are an ARM holder, you might be a bit nervous. However, chances are good that by the time your introductory fixed-rate expires, mortgages rates will have come back down again. After all, we're in a 40+-year downward interest rate channel. Inflation is proving to be transitory after all.
Number Of Mortgages By Interest Rate
Here's a great chart by Black Knight and Axios Visuals highlighting the number of mortgages by interest rate. Notice how the vast majority of mortgage holders have mortgage rates below 4%.
The total number of mortgages in this chart is 53.585 million mortgages. Therefore, let me break down the percentage of mortgages at various interest rates.
Percentage Of Mortgages At Different Interest Rates
Seeing the percentages is more insightful than just seeing absolute numbers. So here are the percentages of mortgages at different mortgage interest rates.
Mortgage interest rate below 2%: 0.53%
Mortgage interest rate 2% – 2.5%: 8.8%
Mortgage interest rate 2.5% – 3%: 24.5%
Mortgage interest rate 3% – 3.5%: 21.1%
Mortgage interest rate 3.5% – 4%: 17.7%
Mortgage interest rate 4% – 4.5%: 11%
Mortgage interest rate 4.5% – 5%: 6.7%
Mortgage interest rate 5% – 5.5%: 2.8%
Mortgage interest rate 5.5% – 6%: 2%
Mortgage interest rate 6% – 6.5%: 1.9%
Mortgage interest rate 6.5%+: 2.9%
There is also a large percentage of the homeownership population that has no mortgage. The latest estimate is roughly 40% of Americans own their homes free and clear. They've discovered the triple benefit of paying off a mortgage early.
Mortgage Percentage Analysis
9.6% of all mortgage holders have a mortgage rate above 5%. The 4.8% of mortgage holders with over a 6% mortgage rate seem to be getting ripped off. The issue must either be bad credit or 30-year fixed-rate mortgages that were taken out 15+ years ago and were never refinanced because they couldn't or couldn't be bothered.
63.3% of mortgage holders have a mortgage interest rate of between 2.5% and 4%. This is the sweet spot where most Americans reside.
I'm thoroughly impressed by the 0.53% of American mortgage holders who have a mortgage rate of under 2%. I'd be even more impressed if most are 30-year fixed-rate mortgages, but I doubt it. Perhaps these mortgage holders paid points to get their mortgage rates so low.
I'm part of the 8.8% of mortgage holders who have a mortgage rate between 2% and 2.5%. Although my primary mortgage is a 7/1 ARM taken out in the late summer of 2020, there weren't any fees (baked into the rate).
I have no regrets taking out an ARM in a rising mortgage rate environment. By the time my ARM resets in 2027, I'm confident rats will be lower. If not, I will have paid off a lot of the mortgage by then.
Expect Homeownership Tenure To Increase With Rising Rates
Before mortgage rates began to rise in 4Q2021, the average homeownership tenure was already increasing. With an increase in mortgage rates, expect the average homeownership tenure to continue to increase as homeowners rationally decide to hold onto their low fixed-rate mortgages for longer.
The utilitarian value of a home has gone way up as more people are spending more time working from home since the pandemic began. Further, more people are recognizing the value of owning real estate for wealth creation, passive income, retirement income, and stability. As a result, more capital will invest in real estate over time.
It doesn't seem like anybody knows the exact average homeownership duration in America. But here is some information by ATTOM Data Solutions, Redfin, and First American Data & Analytics. The main takeaway is the trend of increasing average homeownership tenure.
Average U.S. Homeownership Tenure Over Time
According to ATTOM Data Solutions, the average U.S. homeownership tenure is about eight years. The tenure took a dramatic increase post the global financial crisis in 2009.
According to Redfin, the average U .S. homeowner tenure is about 13.2 years. It has risen from about 10.1 years in 2012.
To get more granular, here is the average homeownership tenure in various major cities in America. It goes from as low as 6.9 years in Atlanta, Georgia to as high as 14 years in cities such as Los Angeles, San Francisco, and San Diego.
Homeowners Will Rationally Stay Put For Longer
If you are a homeowner with a mortgage, just ask yourself whether you plan to live in your home for longer now that mortgage rates are higher. Instead of moving to a bigger house after rates have jumped, maybe you'll just wait things out until mortgage rates go back down. Or, you might use this opportunity to hunt for better deals.
Personally, I bought my “forever home” in 2020. The plan was to raise my kids in it for at least 10 years in the house. Ideally, I wouldn't mind raising them until 2037, when my youngest may go to college. Moving is a pain in the ass. So is paying commissions, taxes, and transfer fees to sell a home.
Therefore, I plan to follow through on my plans to own my home for at least 10 years. If I'm much wealthier by 2030, then I might buy a nicer home. Then I'd rent out our current primary residence to build more passive income.
Higher Homeowership Tenure Means Lower Supply
One of the reasons why I forecasted an 8% median home price appreciation in 2022 is due to continued low supply. Although higher mortgage rates decrease affordability for buyers, thereby putting downward pressure on home prices, I suspect lower supply than expected will act as a counterbalance and keep prices elevated.
As you can see from this one chart from Altos Research, single-family home inventory is extremely low. Originally, it looked as if inventory might rise to about 600,000 – 800,000.
But with rising mortgage rates, I suspect it no longer will over the next couple of years. More homeowners will stay put or landgrab.
Is there no wonder why investors continue to buy single-family homes? Single-family homes benefit from positive demographic trends and are also in chronic undersupply.
Existing Homeownership Affordability Is High
According to Fannie Mae's most recent national housing survey, 92% of homeowners say that their current home is affordable. In addition, 91% of lower-income homeowners say the same thing, up from just 79% at the end of 2017. Not bad at all.
As a result, only the most financially secure homeowners or those who absolutely need to move will likely be moving in this higher interest rate environment.
For those who have the financial means, I would try and find bargains and rent out your low mortgage rate house. Rents continue to be strong, so you may want to capture market forces.
Invest In Real Estate More Surgically
The combination of rising rents and rising capital values is a very powerful wealth-builder. I encourage readers to invest in real estate to build more wealth for the long term.
In 2016, I started diversifying into heartland real estate to take advantage of lower valuations and higher cap rates. I did so by investing $810,000 with real estate crowdfunding platforms. It was a great way to diversify away from expensive coastal city real estate.
Best Private Real Estate Investing Platforms
Fundrise: A way for all investors to diversify into real estate through private funds with just $10. Fundrise has been around since 2012 and manages over $3.3 billion for 400,000+ investors.
The real estate platform invests primarily in residential and industrial properties in the Sunbelt, where valuations are cheaper and yields are higher. The spreading out of America is a long-term demographic trend. For most people, investing in a diversified fund is the way to go.
CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations and higher rental yields. These cities also have higher growth potential due to job growth and demographic trends.
If you are a real estate enthusiast with more time, you can build your own diversified real estate portfolio with CrowdStreet. 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.
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