The chilling effect of high interest rates on the Twin Cities area housing market

Jake and Emily Bure are smitten with the circular metal staircase, gleaming surfaces and open floor plan of the contemporary house they bought nearly three years ago in Shorewood.

But the multilevel showstopper suited them better before they had a toddler. They are now more than ready to move, hopefully to a house with a bigger yard. The problem is, the house they have now fits their budget better than anything else on the market they've considered buying.

Even if they buy a different house for about what they paid for the house they now have, their mortgage rate — and house payment — would nearly double, eating into the budget for other everyday essentials.

"It's super hard to stomach," Jake Bure said. "We've gotten spoiled into having unrealistic expectations about our housing expenses."

Their dilemma is at the heart of why house listings in the Twin Cities area are plummeting, causing buyers to writhe in frustration as they spend months trying to find a house, often paying sellers far more than the asking price and still ending up with a mortgage payment significantly higher than the one they had before.

Today, at least 90% of homeowners with a mortgage have a rate that's less than 4%, according to an analysis by Redfin. Now that rates have nearly doubled from record lows nearly three years ago, few people are willing to swap their lowest-rate-in-a-generation interest rate for a notably higher one.

"And now you have people who can't afford to move because their income is the same as three years ago and they'll never be able to afford it," Jesse Forsell, a Twin Cities area real estate agent, said. "People are just not upgrading because they have a great rate and they're just hunkering down."

The situation is especially difficult for first-time buyers and downsizing baby boomers. Entry-level listings, those priced at less than $400,000, are declining more quickly than move-up houses as the Bures and other first-time homeowners delay their moves. This is restricting the normal flow of houses in that price range back into the market.

Only 1% of all houses have traded hands this year, the lowest in a decade, according to a new report from Redfin, which found that smaller houses in urban areas have the lowest turnover rate of all home types.

At the end of last month, there were only 427 previously owned houses for sale across the entire 16-county metro area priced from $190,000 to $250,000, a 40% decline from last year, according to new data from the Minneapolis Area Realtors. There was only one newly built house in that price range.

Across all price ranges in the metro, sales of previously owned houses fell more than 20%, causing the median price to increase slightly even though annual sales are down. On average, sellers got more than 101% of their asking price, a clear sign that buyers are still outbidding one another.

Higher mortgage rates — and home prices — mean that monthly payments are now at a record high. The average payment on a house that sells for $380,000, which is close to the median sale price of a home in the Twin Cities last month, is now $1,000 more than it would have been three years ago, said the economists at Redfin.

"High mortgage rates are a double whammy because they're discouraging both buyers and sellers — and they're discouraging sellers so much that even the buyers who are out there are having trouble finding a place to buy," Redfin's deputy chief economist Taylor Marr said in a statement. "The lock-in effect is unlikely to go away in the near future. Mortgage rates probably won't drop below 6% before the end of the year, and most homeowners wouldn't be motivated to sell unless rates dropped further. Some of them simply don't want to take on a 6%-plus mortgage rate and some can't afford to."

The average rate for a 30-year mortgage has been hovering at just under 7% this summer, declining slightly last week to 6.78%, according to a weekly survey by Freddie Mac. A year ago at this time, the 30-year was more than a full percentage point lower.

The situation is challenging even for homeowners who have accumulated a significant amount of equity over the past few years that normally would be used to upgrade to a more expensive house.

"It used to be so easy to rationalize upgrading because people could pull equity out and roll that into a new payment," said Forsell. "People who were in those starter homes can no longer upgrade to the $500,000 to $700,000 houses in Plymouth or Eden Prairie. ... They're now stuck in their first-time buyer house."

Forsell himself would like to upgrade. He bought his house for $420,000 in 2020 with a 2.9% mortgage rate and spent $250,000 upgrading it. His neighbor recently sold a similar house for $1.2 million — $250,000 over the list price — and he'd love to get his equity out and buy a bigger house in the same neighborhood.

"I don't want to sell because my payment is so low and I am in one of the best neighborhoods," he said. "I would love to upgrade within my own neighborhood, but I no longer can afford anything else."

Forsell said that some of his clients who need to move are simply keeping their current house and renting it out so they don't have to give up their low rate, making them unintentional landlords. Others are adding on or making upgrades aimed at making the house more compatible with their changing needs.

"I work with a lot of first time and upgrade buyers. ... Almost everyone would love to upgrade," he said. "They're ready. Their family is getting larger but they don't know what to do with their current house."

For now, Jake and Emily Bure are holding steady, but eventually they know they'll need to move, especially once their daughter is ready for school. They know they might need to buy a smaller, lower-quality house than the one they've got if it means they can get into the school district of their choice. And they're even willing to move in with their parents for a while, if they've sold their house and can't find one to replace it.

The decision is a little less complicated for Tyler Jordan-Taylor and his husband, who bought a home in the Bryn Mawr neighborhood in Minneapolis in August of 2017. They just want a little more space.

Jordan-Taylor, who runs a boutique investment advisory firm, said initially they had a 2.6% rate on a 15-year mortgage, but they refinanced and used the equity in the house to buy three rental homes. After refinancing, their rate is still 3%.

They love to entertain and want a house with a bigger dining room, so they have looked at several beautiful homes over the past few years. But they'd have to spend more than $1 million and trade up to a higher rate that would cause their monthly payment to increase significantly.

"This could be doable for us, but it would come at the expense of that extra expendable income, which we love to use for our travel adventures," he said.

For now, they're considering selling, but only if their house fetches top dollar and they can buy a house at what they consider a bargain.

"While I do worry that our dream home may become more and more expensive the more we wait, this payment comparison just makes me realize that our current situation is just so easy and comfortable," he said. "Who doesn't like easy and comfortable?"