Current homeowners have found themselves struggling to sell their homes thanks to what is known as the “golden handcuff” effect. This is due to high interest rates, which have discouraged homeowners from selling homes they purchased when interest rates were much lower. As a result, even homeowners who may want to sell their homes or refinance their existing mortgages will struggle to do so.
Interest Rates Remain High
Interest rates are higher than they have been since the year 2000, with rates reaching a high of 7.23% for 30-year fixed rate mortgages with conforming loan balances in the last week of August. This continues an ongoing trend of interest rates above 7%, which has been daunting for many prospective buyers looking to finance their real estate transactions. This has resulted in what is known as the “golden handcuff” effect, keeping people tied to their properties much longer than they otherwise would be.
The Golden Handcuff Effect
In business terms, a “golden handcuff” normally refers to the use of financial incentives to convince highly compensated employees to stay with a company, such as stock options, bonuses, or a company car. In this case, however, current homeowners are stuck in their current mortgages thanks to having purchased their homes at much lower interest rates. This discourages them from buying new homes, which will come at much higher interest rates, and makes it nearly impossible for many homeowners to refinance.
The Impact on the Market
The most immediate impact of the golden handcuff effect is that it keeps many existing homes off the market, by discouraging people from selling their homes. Many current homeowners purchased their homes when interest rates were at 3 or 4%, meaning that many would need to accept mortgages with interest rates at almost double what they got for their current homes. However, many say they would feel more comfortable if interest rates dropped to 5.5% or lower.
How the “Golden Handcuff” Might Loosen
At the moment, current homeowners say they would be willing to sell their properties if interest rates dropped to more reasonable levels. However, while inflation remains high, the Federal Reserve is unlikely to drop interest rates, which means mortgage interest rates will remain high. Once interest rates begin to fall, however, the golden handcuff effect may decrease, and more people will be able to begin selling their homes once more.
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