Aziz Sunderji - Mortgage lock-ins: move it and lose it
Mortgage lock-ins: move it and lose itExisting mortgages carry a lower interest rate than new ones. Nobody wants to move, so there is nothing to buy.Hi! I’m Aziz. My newsletter contextualizes economic news using data visualization. These days I’m focusing on housing—let me know what you think by replying to this email. The most notable feature of today’s residential housing market is that inventory for sale is absurdly low. There are only about 600,000 homes on the market, compared to 1.5 million in 2016. This is mostly explained by what’s happening with mortgages:
I don’t have inventory data going back further than 2016, but one might imagine that this dynamic has played out before. When interest rates rise, homeowners with existing low-rate mortgages will always be reluctant to sell. But right now their reticence is especially pronounced because so many reset their mortgages recently at very low rates. This is a result of a few factors. First, the Fed’s emergency measures during the pandemic dropped mortgage rates to unprecedented lows (2.65% for a 30y mortgage in early 2021). Many took advantage. Second, we experienced a lifestyle shift: people wanted more space to work from home, or to move away from cities and work remotely. They bought new homes to suit their new realities. And it wasn’t just home buyers that reset their mortgages—about half of the new, low-rate mortgages came from people refinancing their existing homes. Third, inflation rose rapidly, forcing the Fed to embark on the most aggressive hiking cycle in decades, and pushing interest rates up by a lot, and fast. We haven’t seen a rise in interest rates of this magnitude, let alone this speed, since the early 1980s. Had rates stayed low, people would have no problem selling and snapping up another cheap mortgage—but they’re not cheap anymore. “In the end, fourteen million mortgages were refinanced during the COVID refinance boom, and these refinances will have effects on the mortgage market for years to come.” There are other potential explanations for today’s very low inventory. For example, if a large share of buyers have been first-time buyers—who acquire a home but do not supply one in the transaction—that might explain the dearth of homes for sale. But recent research from the New York Federal Reserve shows that the number of first-time buyers as a share of total buyers has been pretty steady for years. Readers have asked me how they can support my work. You are already supporting me by reading this far, but if you’d like to do more, please consider forwarding this email to your friends, family, and/or colleagues, and following me on instagram and twitter. You can also financially support my coffee and croissant addiction by becoming a paying subscriber. Thanks! |
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