Since the pandemic, home prices have surged by nearly 40% over three years, while available listings have decreased by around 20%. Interest rates have reached a 20-year high, paradoxically not dampening prices as one might expect. This situation has created a divide: existing homeowners benefit from fixed monthly payments and increasing home values, while new buyers face daunting costs.
Central to this divide is the 30-year fixed-rate mortgage. Unique in its structure, this mortgage type allows homeowners to lock in their monthly payments for up to three decades, shielding them from inflation and rising interest rates. However, it also enables refinancing when rates drop, creating a one-sided advantage. This contrasts with mortgage systems in other countries, like Britain or Canada, where interest rates are typically fixed for shorter periods, spreading the burden of rate increases more evenly among homeowners and buyers.
In the U.S., the disparity is stark: new buyers may face interest rates of 7.5% or higher, while about two-thirds of existing mortgage holders pay less than 4%. This difference can translate to a $1,000 variation in monthly housing costs on a $400,000 home, leading to a market of “haves and have-nots.”
The U.S. mortgage system discourages existing owners from selling, as moving would mean relinquishing low-interest rates for more expensive ones. This reluctance contributes to a stagnant housing market with limited inventory and reduced affordability. Consequently, existing home sales have plummeted by over 15% in the past year, reaching a low not seen in over a decade. This situation particularly affects millennials, who are increasingly delayed in purchasing their first homes.
The Origin Story
The origin of the 30-year mortgage traces back to the Great Depression. Initially introduced as a response to widespread foreclosures, it has evolved through various economic crises to become the dominant form of home financing in the U.S. While beneficial for individual buyers, critics argue that it has exacerbated an affordability crisis and contributed to a stagnant homeownership rate.
The U.S. mortgage system has also been linked to widening racial and economic inequalities. Wealthier, more financially savvy borrowers are more likely to refinance, benefiting from lower rates, while less sophisticated borrowers, including a disproportionate number of Black and Hispanic homeowners, miss out on these opportunities.
As interest rates rise, the divide between new and existing homeowners grows. New buyers face higher rates and deferred homeownership dreams, while existing homeowners remain insulated. Some economists suggest reforms, like promoting adjustable-rate mortgages, to balance this system.
However, significant changes to the 30-year mortgage are unlikely given its deep entrenchment in the U.S. housing market and the strong opposition any reform would face from those who benefit from the current system. In the meantime, the market is expected to slowly adapt, with potential drops in rates spurring increased activity. Yet, for many aspiring homeowners, the challenges of entering the housing market continue to loom large.