Opinion | A generation of homeowners encounters a strange new market


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As recently as March, a 30-year fixed mortgage looked like a very good deal. The average interest rate was under 4 percent, even though inflation was more than twice that.

That divergence couldn’t last forever, and it didn’t. Just last week, mortgage rates surged by more than a half a percentage point, finishing at 5.78 percent. That’s the biggest single-week increase in more than three decades, and it is going to push the housing market into some uncharted territory. Buyers, sellers and the Federal Reserve are all going to have to learn to navigate this strange new landscape.

Most US homeowners have only known a world where mortgage rates were generally in steady decline — ticking up modestly when markets roiled or the Fed got restive, but still trending downward over time. Rates hit their all-time high in the early 1980s, when Fed Chairman Paul Volcker drastically constricted the money supply to bring America’s last great inflation to a halt. After that, however, came a long downtrend that accelerated after the financial crisis, thanks to an ultra-accommodating monetary policy that the Fed never really unwound even after the economy recovered.

Now suddenly we’re witnessing the kind of surge that hasn’t been seen since the 1970s. Rates are thankfully still lower than they were back then, but they’re increasing fast — more than doubling since January 2021. The last time mortgage rates were this high in late 2008, which means that almost 15 years of home purchasers likely got a better deal than what’s now available.

Some of those people would undoubtedly like to move — to downsize or upsize, to get growing children into a bigger yard or a better school district, to shorten their commute or add a proper home office. But mortgage rates complicate that decision.

Take an average middle-class household with a $240,000 mortgage on a $300,000 house they bought in 2018. If the homeowners have decent credit and refinanced at 3 percent during the pandemic, they’d have a payment of about $1,000 a month. If that family now moves to a house at roughly the same price point, their new monthly payment will likely be a little over $1,400.

Those with money to burn will move anyway, and so will people who really have to; If your new job requires you to be in California, you’ll sell the house in New Jersey and eat the damage. But many who just want to move will probably opt to stay put, instead.

A 2012 paper by economists Fernando Ferreira, Joseph Gyourko and Joseph Tracy estimated that “for every additional $1,000 in mortgage service costs, mobility was about 12 percent lower.” The homeowners in the example above would see an increase in their debt service of nearly $5,000 a year.

Now, not every household will find itself in that position. Older households have often paid their mortgage down or off; Others will have adjustable rate mortgages, or older loans at higher rates that they were unable to refinance for some reason or another. Nonetheless, the effect is likely to be significant — and it means we’re not just facing declining home prices, but declining homeowner mobility.

The last time the United States faced these kinds of “lock-in” dynamics, in the 1970s, the effect was mitigated by a feature few mortgages now have: the ability for a buyer to “assume” the loan of the current owner, taking over the payments along with the property. Because buyers would pay a premium for a property with a low-interest loan attached, homeowners could monetize their lower rate and use that money to help finance a new purchase.

Banks, of course, didn’t like sitting on those older low-rate loans when inflation was pushing up the rates they had to pay on savings accounts, so they started inserting “due on sale” clauses that all but put an end to the assumable mortgage. Government loans made through Veterans Affairs, the Federal Housing Administration and the US Department of Agriculture still offer this option, but they account for a comparatively small fraction of outstanding loans.

This will complicate life for homeowners, obviously, and for employers trying to lure desirable employees from far-off places. But it will also complicate life for policymakers, who cannot easily predict the effects of their interventions on a key sector such as housing. This will make it harder for the Fed to engineer the soft landing. We’re all hoping for.

And this, in turn, is just one example of a broader challenge for policymakers and ordinary citizens alike. The best comparison we have for our current situation is the 1970s, but the economy has changed in all sorts of ways since then.

Taxes and government benefits are indexed to inflation, which exacerbates inflationary pressures. More people now work in services, fewer in capital-intensive, debt-heavy manufacturing. Broader swaths of the economy are exposed to trade, which means being subjected to the actions of other governments and central banks. And as noted above, we’re now more than a decade into an increase in the Fed’s balance sheet, which has undoubtedly contributed to inflation — and will limit the Fed’s options if we end up in a recession.

So however familiar this might feel to those of us with memories of the 1970s, we are in fact on novel ground. And unfortunately, no one has a good road map telling us exactly what comes next.

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