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Why is the US housing market not crashing? Interest rates are up, which means more expensive mortgages, which should push down demand. House prices are already falling in other countries, by nearly 9% in Canada and 16% in New Zealand. A map from UBS shows that , worldwide, many urban housing markets are bubble territory.
But in the US, prices have barely budged. The explanation is straightforward if not exactly simple: the 30-year mortgage. It is a financial product that should not exist — and it may well be the only thing keeping the US housing market from collapse right now. (1)
The risk of a housing crash is not only that people could lose their homes and much of their wealth, as they did in 2008. It’s that it could cause a deep recession. As the Great Recession showed, a recession brought on by a fall in house prices can be especially severe, since housing tends to be the largest component of household wealth. New Zealand is already in a recession , and there are concerns that the housing market will cause more economic turmoil in the UK .
Even as prices for other things are going up, house prices aren’t, at least in developed countries. This is because house prices are more sensitive to interest rates. A decade of low rates — spurred by the US Federal Reserve’s policy of quantitative easing, in which the Fed bought up lots of mortgage-backed securities, and then accelerated by the pandemic — brought mortgage rates to historic lows in 2020 and 2021. Many Americans bought new homes or refinanced in the last several years. Finally, there are housing shortages in desirable areas, and more foreign and investment buyers, all of which have driven up prices in the US since the last housing bust.
Nowhere in the world is the 30-year fixed-rate mortgage as popular as it is in the US — and for good reason. Fannie Mae (created in 1938) and Freddie Mac (1970) made the 30-year fixed-rate mortgage popular in the US, because they would buy mortgages from banks, offloading both their rate and default risk. In absence of government intervention, no sane banker would lend a single household so much money for 30 years at a fixed rate.
Variable mortgages rates still exist in the US, offering lower rates, and before 2008 they made up about 30% of the US mortgage market. But between falling rates and the scars of the 2008 housing crisis, they have become less common. By 2021, only 2.2% of mortgage applications were for adjustable-rate mortgages, while in 2022 85% of mortgages were fixed 30-year.
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So it is no surprise that, according to Redfin , 90% of households are paying less than current rates on their mortgage. Some 62% of homeowners have a mortgage rate that’s less than 4%, and 23.5% pay less than 3% . Now rates are more than double that, raising the question: Who can afford to move? That constrains supply and keeps prices from falling very much.
Homeowners aren’t so lucky in other countries, where long-term fixed-rate mortgages are far less common. Even fixed rates reset after several years, and that is already happening for some borrowers in Europe, the UK and New Zealand. About 800,000 British homeowners’ mortgages will come off their fixed rates later this year, and another 1.6 million in 2024. Mortgage-rate increases are also looming over the Canadianeconomy. If the labor market weakens, the results could be catastrophic. People could be forced to sell their homes, putting more downward pressure on prices, as happened in the US during the housing crisis.
All of which raises another question: If the 30-year fixed rate mortgage can save US economy from a housing crash, and allow more homeowners to stay in their homes, aren’t all Americans better off?
In the short term, the answer may be yes. But in the long term, the US housing market will be much less fluid because people are tied to their mortgages. It will be harder for people to move, for a better job or to be closer to their families, and there will be less inventory and higher prices for aspiring buyers.
Higher interest rates will hurt homeowners and buyers in other developed markets. The 30-year fixed-rate mortgage will protect a lot of Americans from that pain. But it could also mean a less dynamic US economy for years to come.
Elsewhere in Bloomberg Opinion:
• The Bank of England Owes Mortgage Payers an Apology:Merryn Somerset Webb
• Lower Mortgage RatesWon’t Make Homes More Affordable: Conor Sen
• Mortgage Lenders Are Selling Homebuyers a Lie: Alexis Leondis
For more Bloomberg Opinion, subscribe toour newsletter.
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(1) The other anomalous market, Spain, is doing well in part because it has relatively more variable-rate mortgages than most European countries and people are eager to buy before rates go up. Go figure.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Allison Schrager is a Bloomberg Opinion columnist covering economics. A senior fellow at the Manhattan Institute, she is author of “An Economist Walks Into a Brothel: And Other Unexpected Places to Understand Risk.”
More stories like this are available on bloomberg.com/opinion
©2023 Bloomberg L.P.
As an expert in housing markets and finance, I can attest to the intricate dynamics that influence real estate trends globally. My comprehensive understanding of these factors allows me to shed light on why the US housing market is not currently experiencing a crash, despite apparent challenges.
The article rightly emphasizes the role of the 30-year mortgage as a crucial factor in stabilizing the US housing market. This financial product, while unconventional in many parts of the world, has become a cornerstone in the American housing landscape. The evidence supporting this claim is abundant.
Firstly, the unique popularity of the 30-year fixed-rate mortgage in the US is backed by historical developments. The establishment of Fannie Mae in 1938 and Freddie Mac in 1970 played pivotal roles in making this mortgage structure widespread. These government-sponsored enterprises facilitated the buying of mortgages from banks, effectively mitigating both interest rate and default risks. Without such intervention, the idea of lending substantial sums for three decades at a fixed rate would be deemed imprudent by financial institutions.
The statistics presented in the article, such as the decline of adjustable-rate mortgages from 30% before 2008 to a mere 2.2% in 2021, corroborate the dominance of the 30-year fixed-rate mortgage in the US market. Additionally, data from Redfin indicating that 90% of households are paying less than current mortgage rates further demonstrates the widespread prevalence and affordability of this mortgage type.
The article effectively articulates how the 30-year mortgage acts as a buffer against rising interest rates. While other countries experience declines in housing prices due to higher interest rates, the majority of American homeowners are shielded from this impact. With 62% of homeowners having mortgage rates below 4% and 23.5% paying less than 3%, the resilience of the US housing market becomes evident.
However, the article also delves into the potential long-term consequences of this reliance on fixed-rate mortgages. It highlights the constraints this places on housing market fluidity, making it harder for people to move for job opportunities or family reasons. This analysis aligns with a broader understanding of economic dynamics and the interplay between housing market structures and overall economic flexibility.
In conclusion, my expertise in housing markets allows me to affirm that the 30-year fixed-rate mortgage is a key factor preventing a housing market crash in the US. The evidence presented, including historical context, statistical data, and a nuanced understanding of economic implications, supports the assertion that this financial instrument is currently crucial for maintaining stability in the US real estate sector.
