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Why isn’t the US housing market collapsing? Rising interest rates mean more expensive mortgages, which should depress demand. House prices are already falling elsewhere, nearly 9% in Canada and 16% in New Zealand. A map from UBS shows that many urban housing markets around the world are in bubble territory.
But in the US, prices have barely changed. The explanation is simple, if not entirely straightforward: the 30-year mortgage. It’s a financial product that shouldn’t exist – and it may be the only thing keeping the US housing market from collapsing right now. (1)
The risk of a housing crash is not only that people could lose their homes and much of their wealth, as was the case in 2008, but that it could trigger a deep recession. As the Great Recession demonstrated, a recession caused by a fall in house prices can be particularly severe, as residential property tends to account for the bulk of household wealth. New Zealand is already in recession and there are concerns that the UK property market will lead to further economic turmoil.
While prices of other things are rising, so are real estate prices, at least not in developed countries. This is because property prices are more sensitive to interest rates. A decade of low interest rates – spurred by the Federal Reserve’s quantitative easing policy, during which the Fed bought many mortgage-backed securities, and then accelerated by the pandemic – pushed mortgage rates to historic lows in 2020 and 2021. Many Americans have bought new homes or refinanced in recent years. Finally, there are housing shortages in desirable areas and more foreign buyers and investment buyers, all of which have pushed up prices in the US since the last housing crisis.
Nowhere in the world is the 30-year fixed-rate mortgage as popular as it is in the US — and with good reason. Fannie Mae (founded 1938) and Freddie Mac (1970) popularized the 30-year fixed-rate mortgage in the United States because they bought mortgages from banks, relieving both their interest rate and default risk. Without government intervention, no sane banker would lend a single household that much money at a fixed rate for 30 years.
Adjustable rate mortgages still exist in the US, which offer lower interest rates, and prior to 2008 they accounted for about 30% of the US mortgage market. But due to falling interest rates and the scars of the 2008 housing crisis, they’ve become rarer. In 2021, only 2.2% of mortgage applications were for adjustable rate mortgages, while in 2022 85% of mortgages were fixed at 30 years.
So it’s no surprise that 90% of households are paying less than current interest rates on their mortgage, according to Redfin. About 62% of homeowners have a mortgage rate less than 4%, and 23.5% pay less than 3%. Interest rates are now more than double, which begs the question: who can afford to move? This limits supply and prevents prices from falling sharply.
Homeowners aren’t so lucky in other countries, where long-term fixed-rate mortgages are far less common. Even fixed interest rates reset after several years, and this is already happening for some borrowers in Europe, the UK and New Zealand. About 800,000 UK homeowners’ mortgages will be freed from their fixed rates later this year, with another 1.6 million in 2024. The Canadian economy is also showing signs of rising mortgage rates. Should the labor market weaken, the consequences could be catastrophic. People could be forced to sell their homes, which would result in more downward pressure on prices, as was the case in the US during the housing crisis.
All of which raises another question: If the 30-year fixed-rate mortgage can save the US economy from a housing crash and allow more homeowners to stay in their homes, won’t all Americans be better off?
In the short term, the answer could be yes. But over the long term, the US housing market will be significantly less dynamic because people are tied to their mortgages. People will find it harder to relocate to find a better job or be closer to their families, and there will be less inventory and higher prices for potential buyers.
Higher interest rates will hurt homeowners and buyers in other developed markets. The 30-year fixed-rate mortgage will save many Americans from that pain. But it could also mean that the US economy will lose momentum in the coming years.
Elsewhere in the Bloomberg Opinion:
• The Bank of England owes an apology to mortgage payers: Merryn Somerset Webb
• Lower mortgage rates won’t make houses more affordable: Conor Sen
• Mortgage lenders are selling a lie to homebuyers: Alexis Leondis
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(1) The other anomalous market, Spain, is doing well in part because it has comparatively more adjustable rate mortgages than most European countries and people like to buy before interest rates rise. Imagine that.
This column does not necessarily reflect the opinion of the editors or of Bloomberg LP and its owners.
Allison Schrager is a columnist at Bloomberg Opinion covering business issues. A senior fellow at the Manhattan Institute, she is the author of An Economist Walks Into a Brothel: And Other Unexpected Places to Understand Risk.
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