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How a home mortgage 'lock in' impacts the entire housing market

Aug 28, 2023Aug 28, 2023


The average mortgage rate on a home in the U.S is over 7%. That's the highest level in more than two decades. As a result, a lot of homeowners are staying put in their current homes instead of buying a new place and taking out a mortgage with a much higher rate. Wailin Wong and Darian Woods from our daily economics show The Indicator From Planet Money explain how that decision impacts the entire housing market.

DARIAN WOODS, BYLINE: The vast majority of homeowners in the U.S. have a 30-year fixed mortgage. They get one interest rate at the time they borrow the money, and that rate stays the same for 30 years. And that makes the U.S. mortgage market pretty unique.

WAILIN WONG, BYLINE: And there are benefits to the 30-year fixed mortgage. Julia Fonseca is a professor at the Gies College of Business at the University of Illinois at Urbana-Champaign. She says the 30-year fixed mortgage insulates people against interest rate increases, but when rates do go up and a homeowner wants to move...

JULIA FONSECA: This is going to add to the financial cost of moving because you have to pay off this loan at a very low rate and take out a new one at a much higher rate. We wanted to ask, what does that do to borrowers? Why does this matter? And I think one reason why we should definitely care about this is it affects other people.

WOODS: Julia researched these effects for a working paper released earlier this year. She co-authored the paper with Lu Liu, a professor at the Wharton School at the University of Pennsylvania. And they studied data on millions of mortgage borrowers between 2010 and 2018. They were looking at the impact of mortgage rate lock-in on housing markets and labor markets.

WONG: In a healthy housing market, you have first-time homeowners buying starter homes, and you have current homeowners upgrading from starter homes to something nicer or maybe they're moving in search of job opportunities.

WOODS: But with mortgage rate lock-in, current homeowners don't move because they'd have to give up a low rate for a high one.

WONG: In fact, Julia and her co-author found that for every one percentage point increase in mortgage rates, moving rates go down by 9%.

WOODS: It's a substantial decline in people moving, and that means fewer homes for sale. And that squeeze on supply could keep home prices high, at least in the short term.

FONSECA: If no one is putting up their homes for sale, that doesn't just affect the person who is not upgrading to a better home. This could affect that first-time homebuyer that can't find a home to purchase. And that might even be a factor in explaining why house prices in the U.S. have not declined much, while in other countries, there we're really seeing house price declines.

WONG: Julia and her co-author found that mortgage lock-in leads to fewer people moving for better-paying jobs.

WOODS: In other words, a worker might give up a job that pays better or is a better match for their skills because the financial cost of moving outweighs those benefits. And when these individual decisions are added up across the economy, that can disrupt the smooth functioning of labor markets.

FONSECA: It could keep workers from finding the best jobs. It could keep firms from finding the best workers.

WONG: Julia says there are some ways to alleviate mortgage lock-in. The industry could look at offering portable mortgages. That's where a homeowner can transfer the terms of their existing loan to a new property. It's common in some countries outside of the U.S.

WOODS: Darian Woods.

WONG: Wailin Wong, NPR News. Transcript provided by NPR, Copyright NPR.

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