Metro Atlanta home sellers trapped in their low rate loans

ATLANTA - Eighty-five percent of folks who hope to buy a house need to sell their existing house to make it possible.  But most of those folks either bought or refinanced when interest rates were about half what they are today. So why is that a problem? Here to break this down is FOX 5 Real Estate Expert, John Adams.

Most prospective buyers need to sell their existing homes before they can buy. But there's a problem.

Their existing home loan is probably in the range of 3% to 4%, and when they sell that house, they can only replace their loan with one that is in the neighborhood of 6.5%, and they just can’t justify the huge increase in monthly payments.

That means you can’t just sell your house and take the existing mortgage with you to the replacement house. Because the current home is the collateral for the current mortgage, it must be paid off when the property sells.

Lenders know that the average American homeowner will want to move about once every 7 to 9 years, on average. That means the lender will collect his cash at closing, then turn around and lend that same money back to a borrower, but this time at 6.5% instead of 3.25%.  Bankers aren’t so dumb after all.

That's affecting buyers and sellers not just in metro Atlanta, but all across the country. Owners who want or need to move, for whatever reason, feel trapped by their existing low interest rate loan.

One prospective seller told Adams:  "I don’t mind paying too much for a house in Atlanta - but I just can’t swallow the idea of paying too much and having to pay double the interest rate."  They just decided to stay put.

Adams says out of control government spending coupled with new regulations designed to hurt the business sector are what caused the situation:

During the COVID-19 pandemic, we spent trillions of dollars that we didn’t have, and handed it out to everyone who said they wanted it.  We didn’t have the money, so we printed it. Instead of paying for that, we put all of it on our national credit card.  Now we owe almost $32 trillion, and that caused inflation.  

Jay Powell at the Fed decided to put the brakes on inflation by raising interest rates.  And a couple of weeks ago, the Fed raised rates for the 10th straight time, and while mortgage rates don’t track on the federal funds rate, they often move in the same direction for similar reasons.

And while normally home prices would come down to offset the interest rate increases, prices have remained stubbornly high because we are right in the middle of a severe housing shortage.  In metro Atlanta, our current inventory is just under two months worth of sales. Typically, we think of six months of inventory as a state of equilibrium between a buyers market and a sellers market.

When asked if there is anything that a prospective seller can do to get moved into the next house they want, Adams says that - depending on their financial circumstances and their comfort level - they can keep their current house and turn it into a rental.  That preserves the benefit of the low interest rate loan. As they collect high rates of rent, that can offset at least some of the higher costs at the new house.

The bottom line is that it’s important to remember that only the government can cause inflation.  And inflation, in particular, hurts those who can least afford it. And while today’s interest rates seem high, they are historically just about average. Adam's advice is to go ahead and buy what you need, then plan on refinancing if and when interest rates come down.

Atlanta native John Adams has been a real estate broker and investor in residential real estate for the past four decades.