Breaking the 'Golden Handcuffs'

For Jennifer Lovelace, a "great deal" quickly turned into an inescapable bind...

The 39-year-old realtor started by making what, in hindsight, was a fantastic financial decision. She bought a home in St. Augustine, Florida in January 2020.

This was just before the pandemic dried up inventory and sent home prices soaring... So, thankfully, she didn't have to make dozens of offers above listing price just to have a shot in the market.

Instead, she was able to buy cheap... paying only $215,000. And she locked in a historically low 3.25% interest rate.

Last year, Lovelace told Fortune that she bought her house thinking it would be a perfect starter home. She hoped to move on in a few years. But now, she's trapped...

Interest rates have more than doubled since then. Home prices have soared as well, rising more than 50% in her area. That means her home is worth more, too... But even if she sold for a profit, moving would lead to a hefty increase in her mortgage payment.

She's frustrated with the situation. But she's stuck. As she told Fortune...

We're staying put here for right now, waiting to see if the rates come down or prices come down.

Lovelace's story isn't unique. She's one of many homeowners who feel trapped today. The proverbial "golden handcuffs" of an ultra-low mortgage rate make it seem foolish – or impossible – to consider moving.

Today, we'll look at this situation... and why these "golden handcuffs" could soon break for millions of Americans.

The "golden handcuffs" might seem like the kind of problem most folks would be grateful to have. After all, affordable homeownership is still just a dream for plenty of other Americans.

It's a widespread issue, though. And it's taking its toll on the housing market.

According to a January report from real estate data provider Redfin, 86% of U.S. homeowners have mortgages at sub-6% rates. That's down from 93% in mid-2022. But it means a vast majority of folks feel stuck, thanks to their current mortgage rate.

What's more, 76% of American homeowners have a mortgage below 5%. That means even though mortgage rates are falling – currently down from 7.2% in May to 6.2% – it doesn't make sense for many to consider selling or refinancing yet.

If you ask most folks, they'll tell you it will take at least a decade for this problem to work itself out.

They're wrong.

Housing activity is already showing signs of life. And the trend is about to kick into high gear.

The reason, of course, is the Federal Reserve. The Fed has already begun cutting interest rates... And it plans to keep lowering rates in the months to come.

Lower rates from the Fed means mortgage rates will keep falling. And lower and lower mortgage rates mean the "golden handcuffs" will break for more and more Americans.

You see, the market sets every other interest rate based on the fed-funds rate. When the fed-funds rate is falling, we can expect other interest rates to fall as well. That includes mortgage rates... and the 10-year Treasury yield.

The market was quick to move on some of its expectations ahead of the Fed. The 10-year Treasury yield fell as low as 3.6% last month. That's way down from the 4.7% rate we saw in April.

The 10-year yield also has a unique relationship to mortgage rates. Mortgage rates are always higher than the 10-year yield... But they're too high right now.

From 2000 to 2019, before the pandemic upended the market, the average spread between the two rates was 1.6 percentage points. But in March 2023, mortgage rates were 3.5 percentage points higher than the 10-year yield.

Even after a decline, they're still around 3 percentage points higher today. In other words... mortgage rates are simply too high.

This situation can't – and won't – last forever.

We've seen the 10-year yield bounce back recently. But as the Fed lowers rates, we should expect it to trend downward overall... and the spread to go back to levels similar to what we saw before the pandemic.

If the 10-year yield drops to 3.25% and this spread goes back to normal, we'll see mortgage rates at around 4.9%.

Let me say that again...

There's a strong chance we'll see mortgage rates below 5% by the end of next year.

This is a simple but powerful trend. It points to a flood of activity in the housing market, which will boost the overall economy in the process. We're in the early innings right now.

The "golden handcuffs" are beginning to break. And that shift will only get stronger from here.

Good investing,

Brett Eversole