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 U.S. 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 was 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 debt 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,…



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