U.S. Economy
One big reason the U.S. housing market is broken: Owners don’t want to give up their cushy old loans.
Credit…Photo illustration by Alex Merto
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Buying a home was hard before the pandemic. Somehow, it keeps getting harder.
Prices, already sky-high, have gotten even higher, up nearly 40 percent over the past three years. Available homes have gotten scarcer: Listings are down nearly 20 percent over the same period. And now interest rates have soared to a 20-year high, eroding buying power without — in defiance of normal economic logic — doing much to dent prices.
None of which, of course, is a problem for people who already own homes. They have been insulated from rising interest rates and, to a degree, from rising consumer prices. Their homes are worth more than ever. Their monthly housing costs are, for the most part, locked in place.
The reason for that divide — a big part of it, anyway — is a unique, ubiquitous feature of the U.S. housing market: the 30-year fixed-rate mortgage.
That mortgage has been so common for so long that it can be easy to forget how strange it is. Because the interest rate is fixed, homeowners get to freeze their monthly loan payments for as much as three decades, even if inflation picks up or interest rates rise. But because most U.S. mortgages can be paid off early with no penalty, homeowners can simply refinance if rates go down. Buyers get all of the benefits of a fixed rate, with none of the risks.
“It’s a one-sided bet,” said John Y. Campbell, a Harvard economist who has argued that the 30-year mortgage contributes to inequality. “If inflation goes way up, the lenders lose and the borrowers win. Whereas if inflation goes down, the borrower just refinances.”
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A 30-Year Trap: The Problem With America's Weird Mortgages – The New York Times
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