When Does A Home Become A Prison?

Authored by Mark Fleming via First American Economic Center blog,

The housing market is suffering from a supply shortage, not a demand dilemma. As Millennial first-time homebuyer demand continues to increase, the inventory of homes for sale tightens. At the same time, prices are increasing, so why aren’t there more homeowners selling their homes?

In most markets, the seller, or supplier, makes their decision about adding supply to the market independent of the buyer, or source of demand, and their decision to buy. In the housing market, the seller and the buyer are, in many cases, actually the same economic actor. In order to buy a new home, you have to sell the home you already own.

So, in a market with rising prices and strong demand, what’s preventing existing homeowners from putting their homes on the market?

“Existing homeowners are increasingly financially imprisoned in their own home by their historically low mortgage rate. It makes choosing a kitchen renovation seem more appealing than moving.”

The housing market has experienced a long-run decline in mortgage rates from a high of 18 percent for the 30-year, fixed-rate mortgage in 1981 to a low of almost 3 percent in 2012. Today, five years later, mortgage rates remain just a stone’s throw away from that historic low point. This long-run decline in rates encouraged existing homeowners to both move more often and to refinance more often, in many cases refinancing multiple times between each move.

It’s widely expected that mortgage rates will rise further. This is more important than we may even realize because the housing market has not experienced a rising rate environment in almost three decades! No longer is there a financial incentive to refinance for most homeowners, and there’s more to consider when moving. Why move when it will cost more each month to borrow the same amount from the bank? A homeowner can re-extend the mortgage term another 30 years to increase the amount one can borrow at the higher rate, but the mortgage has to be paid off at some point.  Hopefully before or soon after retirement. Existing homeowners are increasingly financially imprisoned in their own home by their historically low mortgage rate. It makes choosing a kitchen renovation seem more appealing than moving.”

There is one more possibility caused by the fact that the existing-home owner is both seller and buyer. In today’s market, sellers face a prisoner’s dilemma, a situation in which individuals don’t cooperate with each other, even though it is seemingly in their best interest to do so.

Consider two existing homeowners. They both want to buy a new house and move, but are unable to communicate with each other. If they both choose to sell, they both benefit because they increase the inventory of homes available, and collectively alleviate the supply shortage. However, if one chooses to sell and the other doesn’t, the seller must buy a new home in a market with a shortage of supply, bidding wars and escalating prices. Because of this risk, neither homeowner sells (non-cooperation) and neither get what they wanted in the first place – a move to a new, more desirable home. Imagine this scenario playing out across an entire market. If everyone sells there will be plenty of supply. But, the risk of selling when others don’t convinces everyone not to sell and produces the non-cooperative outcome.

Possible Outcomes

  1. Owner moves, but pays a price escalated by supply shortages for a more desirable home
  2. Owner stays in current house and does not get a more desirable home
  3. Owner moves, finding a more desirable home without paying a price escalated by supply shortages

Rising mortgage rates and the fear of not being able to find something affordable to buy is imprisoning homeowners and causing the inventory shortages that are seen in practically every market across the country. So, what gives in a market short of supply relative to demand? Prices. According to the First American Real House Price Index, the fast pace of house price growth, combined with rising rates, has had a material impact on affordability. In our most recent analysis in April, affordability was down 11 percent compared to a year ago. It was once said that a man’s home is his castle.  In today’s market, a man’s home may be his prison, but he is getting wealthier for it.


Life of Illusion Jim Sampson (not verified) Thu, 07/20/2017 - 18:27 Permalink

This guys a nut !The reason inventory is so low b/c FED flooded market purchasing MBS along with Fannie/Freddie to save the market.Refinance again and again as neg equity turn positive. Homeowners living off refi cash flow not moving,,,home atm .Thus hit men Private equity (rental programs) and investors drove the price through the roof by wiping out inventories. Only large/public builders left as small builders BK , leaving few builders controlling new home builds keeping tight inventories , prices high. GET GOV OUT NOW AND SEE WHAT HAPPENS! 

In reply to by Jim Sampson (not verified)

Creepy_Azz_Crackaah (not verified) Life of Illusion Thu, 07/20/2017 - 18:41 Permalink

Try stopping your "rent" (property tax) payment to the compassionate gubmint and see who's house it is next year. And for those who are horrified over repair bills so want to rent... you don't understand that rents are priced to cover all repair bills, etc.  You'll pay for it one way or another.

In reply to by Life of Illusion

Déjà view armada (not verified) Fri, 07/21/2017 - 03:17 Permalink

Basement dwellers...beware

Radon gas given off by soil or rock can enter buildings through cracks in floors or walls; construction joints; or gaps in foundations around pipes, wires, or pumps. Radon levels are usually highest in the basement or crawl space. This level is closest to the soil or rock that is the source of the radon. Therefore, people who spend much of their time in basement rooms at home or at work have a greater risk for being exposed.

According to the EPA, the average indoor radon level is about 1.3 picocuries per liter (pCi/L). People should take action to lower radon levels in the home if the level is 4.0 pCi/L or higher. The EPA estimates that nearly 1 out of every 15 homes in the United States has elevated radon levels.


In reply to by armada (not verified)

Paul Kersey Creepy_Azz_Crackaah (not verified) Thu, 07/20/2017 - 19:09 Permalink

"you don't understand that rents are priced to cover all repair bills, etc."

I wish. I own rental houses, and my property taxes went up 34% in one year. If I tried to raise my rents to cover my added tax costs, my tenants would move. I still remember when Denver had a rental unit shortage. Landlords raised rents, and so many tenants doubled and tripled up, that vacancies were created. Landlords, who could afford it, lowered rents to keep their properties rented. Tenants, in general, aren't seeing increases in their wages. Consequently, if they can't afford to pay more, they will get roommates or move in with mom and dad.

In reply to by Creepy_Azz_Crackaah (not verified)

PT cheeseheader Thu, 07/20/2017 - 21:08 Permalink

Re "so why aren’t there more homeowners selling their homes?":  Wrong question."House prices were high so I went to sell my home, but then I needed somewhere to live.  I went to buy another home, but - blow me down with a feather! - all the other homes were expensive too!  I lost all that money I made ... plus the transfer costs."The real questions:Why aren't builders building more?  (Then again, location location location - land, they're not building any more of it.)What happens to all the foreclosed homes?

In reply to by cheeseheader

buttmint Life of Illusion Fri, 07/21/2017 - 01:22 Permalink

....message to Millenials---get off your butt and study ALL TRADES. Those Sunset Books on Electricity and Building a frame house? Buy all the books from Salvation Army or Goodwill. The Sunset series used to cost $4.95 new, now over $10. Excellent infor contained within all the Sunset books.Good info---read and job yourself out to various tradesmen....like roofing....yeah, offer to assist working all day in the heat on a roof---for free. Job yourself out to plumbers, carpenters, remodeling companies, and tile setters. Learn all the trades and begin dreaming about the house you are going to build. Dreams are very important. You need to plan ahead all your moves and a offer for "patch of land" will come up. You already know the backhoe operators in the area, masons, etc. Get busy! Keep at it and you can skip all this mortgage nightmare. You are building EQUITY into YOUR HOUSE from Day One. If you enjoy what you do, you never work a day in your life----very true!

In reply to by Life of Illusion

buttmint cheech_wizard Fri, 07/21/2017 - 01:27 Permalink

Florida with 24 million people leads the nation in LIGHTNING STRIKESNew Mexico with 1.5 million residents spread out over a HUGE state leads the nation in LIGHTNING FATALITIES. Check out Langmuir at Magdalena, NM which is near Soccorro, about 1 hour south of ABQ. Langmuir is the nation's lightning research lab.Also--check out Pietown, New Mexico and search for "Lightning Ranch." You will not be let down......

In reply to by cheech_wizard

artichoke Jim Sampson (not verified) Sun, 07/23/2017 - 11:33 Permalink

All expenses you would have in an apartment, except the well pump.And that well pump gets you fresh water, unfluoridated, uncontaminated.  We used to live in a suburb with city water, and that water was getting bad.  We moved.  But I wondered why locals didn't get dig wells.  It's illegal there I think, but who would know?

In reply to by Jim Sampson (not verified)

Manipuflation JuliaS Thu, 07/20/2017 - 18:32 Permalink

Something the native Americans did not understand and I agree with them.  My father died when I was six months old and I was lucky enough to be taken under the wing of a "Buck".  He taught me how to hunt and fish.  He lived a simple life and never married.  Never any complications.  It was always pretty simple with him.  If you wanted to do something then you had to work for it first. 

In reply to by JuliaS

richsob Thu, 07/20/2017 - 18:11 Permalink

Buy a home that is not too big for you in a nice neighborhood then upgrade it instead of constantly trying to trade up.  You'll save money and whole lot of grief doing it that way

Horseless Headsman Thu, 07/20/2017 - 18:32 Permalink

I feel left out. Prices here (SE MO) are down 10% from 2000, and 25% from the peak. Lots of for sale signs, few buyers. I have 6 properties listd since March, only 1 offer from a low-ball vulture, and only 3 showings.

Food Loaf Junkie Horseless Headsman Thu, 07/20/2017 - 18:55 Permalink

I agree, up here in the far north, (Michigan's U.P.) I see empty houses everywhere and tax sale signs are common.  Even large tracts of good land are poping up cheap if you are watching.  I just missed on 70 acres for $38,000.  People are selling cuz they NEED the cash.  Outside of tech areas people just ain't makin it on part time. :-(

In reply to by Horseless Headsman