Something profoundly unusual has happened in the U.S. housing market over the past two years, as mortgage rates have risen to around 7 percent.
Such high rates are not, in themselves, historically remarkable. The problem is that the average American household with a mortgage benefits from a fixed rate that is a considerable three points lower.
The gap that has grown between these two lines has created a nationwide lockdown effect – crippling people in homes they might wish to leave – on a scale not seen in decades. For homeowners who aren’t looking to move anytime soon, the low rates they got during the pandemic will benefit them for years to come. But for many others, these rates have become a complication, disrupting both household decisions and the housing market as a whole.
Indeed, according to new search According to economists at the Federal Housing Finance Agency, this lock-in effect is responsible for about 1.3 million fewer home sales in the United States during the rate hike between spring 2022 and the end of 2023. That’s a surprising figure in a country. where around five million houses are sold each year in more normal times – most to people who already own them.
These stranded households did not move for better jobs or higher wages, and were not able to downsize or acquire more space. They also did not open the houses to first-time buyers. And that drove up prices and crowded the market.
Another way to put how unusual this dynamic is: Between 1998 and 2020, there was never a time when more than 40% of U.S. mortgage holders had rates locked in by more than one percentage point lower. percentage at market conditions. By the end of 2023, as the chart below shows, approximately 70% of all mortgage holders had rates above three percentage points below what the market would offer them if they tried to take out a new loan.
Of all the stories this image tells, the biggest one it reflects is the stagnant housing market that could also fuel broader frustration with the economy.
To show how we got here, consider the distribution of rates held by all U.S. homeowners with fixed-rate mortgages, going back in time.
In the late 1990s and early 2000s, early in the period covered by the FHFA analysis, most homeowners had rates between about 7 and 9 percent. Rates then fell with the Internet industry recession, and fell further coming out of the Great Recession. Many homeowners also refinanced along the way.
Then, at the start of the pandemic, rates hit historic lows, giving many households deals below 3%.
During most of this period of generally falling rates and regular refinancing, most homeowners maintained rates that weren’t that different — within a percentage point or so — from what they could get with a new ready. If you held a higher-than-market mortgage rate, it made moving or refinancing relatively painless. If you had a lower rate, the difference was rarely big enough to discourage people from changing residence.
But that has changed significantly over the past two years, as the Fed battled inflation and interest rates on all types of loans skyrocketed.
It may seem strange to suggest that there is currently a problem with so many people getting great housing deals during the pandemic. The problem is that rates have risen so high and so quickly from the pandemic’s lowest point. Seemingly overnight, most American homeowners with mortgages found themselves in a situation where it might now seem financially foolish to sell their home.
“You could think of your locked rate as an asset that you own,” said Julia Fonseca, a professor at the University of Illinois at Urbana-Champaign.
And over this period, this asset has never had as much value as it does today.
Professor Fonseca estimates that rate locks are worth around $50,000 to the average mortgage holder. That’s about the extra amount people would have to spend if they swapped the remaining payments on their current mortgage for higher payments at current rates.
In other words, FHFA researchers estimate that this difference amounted to about $511 per month for the average mortgage holder at the end of 2023. That’s enough to influence decisions made by households and cause shock waves in the real estate market.
“These are real families who are failing to optimize their housing,” said Jonah Coste, an FHFA economist who worked on the study.
The ripple effects are already evident in other research. Economists Jack Liebersohn and Jesse Rothstein note that mobility rates have fallen for homeowners with a mortgage in 2022 and 2023, at a time when there was no comparable decline in homeowner mobility without mortgages or for tenants.
Professor Fonseca and Lu Liu of the University of Pennsylvania also find that the most locked-in owners are less likely to move towards neighboring areas with strong wage growth. This suggests how housing market disruptions can create problems in the labor market, ultimately preventing companies from hiring the right workers or preventing wages from rising further.
All of this comes not just from the high level of interest rates today, but also from the particular sequence of events that led us here.
“We have never experienced anything like the last four years,” Professor Rothstein said.
Some of these effects may resemble those in the years after the 2008 housing crash, when a different problem — undervalued mortgages — stuck many people in homes they wanted to leave. But today’s challenge could be more lasting. This is because 30-year mortgage rates are locked in for 30 years and rates below 3% are unlikely to be revisited anytime soon.
President Biden highlighted how unsettling this may seem to many people. In his State of the Union last month, he spoke directly to everyone who is worried about interest rates. “If inflation continues to fall, mortgage rates will also fall,” he said.
But while many Americans wait, he proposed temporary tax credits of up to $10,000 for new buyers and homeowners who sell to them. For first-time buyers making psychologically difficult mortgage calculations at home, the White House emphasizes that for a median-priced home, this equates to a rate reduction of more than 1.5 percentage points for two years.
However, for homeowners who have not wanted to sell until now, that sum is far less than the $50,000 that locked-in rates are effectively worth to a typical mortgage holder.
