‘Accidental landlords’ are raking in the benefits of today’s interest rates

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Published Date 3/20/2023

Think of how great it would be if home sellers could pass along their pandemic-low interest rates to those who might buy their home. Homes would be selling like hotcakes, even at higher prices. When we were in the middle of that seemingly endless period of 3% loans, however, it seems we may not have appreciated it as much as we should have.

No matter. Today’s homeowners who locked those low, low rates simply aren’t selling, according to Fortune’s Alena Botros, who explains how some of them are even becoming “accidental landlords,” simply because they don’t want to lose their low rates of the past.

Botros points out how this so-called lock-in effect is putting pressure on both sides of the market. Many buyers have given up on looking, while sellers looking to change their digs for a bigger or smaller one are worried they’d get stuck with a mortgage rate more than twice as high as their old one.

Redfin’s chief economist Daryl Fairweather told Fortune that high rates are constricting activity. “They’re looking at their monthly payment, which is quite low if they locked in a 3% mortgage rate compared to what their monthly payment would be if they sold and bought again, which would be quite high given how high mortgage rates are,” Fairweather said. “And it just makes a lot of sense for them to hold on to that low interest rate.”

If you took on a $700,000 mortgage with a 7% rate, your total monthly payment would be $4,657. But with the same size loan at a 4% rate, your monthly payment would be $3,342. Push that down to 3% with the same size loan, and your monthly payment would be $2,951. Botros likened it to the “golden-handcuffs of mortgage rates” — that which keeps homeowners with low rates from selling. It’s also doing something else, however. It’s turning some into landlords.

If it’s not feasible to sell your property(ies), it’s evidently turning into a time to rent. Many are making an extra $1,000 a month after expenses, according to one source in Botros' research, who says, “Inflation is real, but when you have an asset where the debt is fixed, and especially if it’s fixed at 3% and we’re running at inflation of above 3%, you win. It’s like printing money. It’s the 30-year fixed rate debt, that’s the magic in this.”

Botros uses the example of Top Dollar’s Josh Dudick, who told her that once mortgage rates dropped, around 2020 and 2021, he refinanced his vacation home in the Hamptons at a 30-year fixed rate below 3%. “Dudick said he was thinking of selling but decided to rent it out instead because he’d have to pay capital gains on his return and he’d lose that ‘really low mortgage rate he locked in,” says Botros. “With renting it out, Dudick’s covering his monthly mortgage payments and some, all the while the value of the home (that he originally purchased for more than $1.5 million) has doubled.”

Rather than sell, some homeowners report that renting out their properties can now cover a monthly mortgage payment, insurance, and taxes while making them a small profit each month — a better use of money than simply owning a property, particularly, as the home appreciates. And there is evidently no shortage of people looking for rentals.

Los Angeles-based real estate agent with Compass, Mackenzie Stone, told Fortune that she bought her home in Los Angeles in the summer of 2021 when rates were lower but expected to climb up. Her offer was one many, all over the asking price. Once she won the bid, she locked in a 30-year fixed rate in the low fours, which Stone says, “is absolutely crazy compared to where they are today.” Instead of renting it out long-term, Stone is renting it out through Airbnb and making about three times her monthly mortgage because of the low rate.

While fewer sellers means high inventory and less supply, Botros explains how there are actually three markets: the move-up market, and the first-time homebuyer market, and the luxury market. In the luxury market, purchases are falling at a record 44.6% year-over-year during the three months ending Jan. 31, according to Redfin. The move-up market remains stagnant, and the first-time homebuyer market is hot because there’s not enough inventory, exacerbated by homeowners that have locked in their low rates and are choosing not to sell.

So we’re stuck. For a while, anyway.

Fortune, TBWS

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