Americans have a strong affinity for fixed-rate mortgages, but their preference for them has led to economic complications. This poses a problem for central bankers gathered at the annual Jackson Hole Economic Symposium in Wyoming. One reason why the Federal Reserve has struggled to lower inflation is because consumer spending remains robust. This is partially due to the fact that most homeowners with mortgages (which account for 40% of American families) have not felt the impact of the Fed’s rate-raising campaign, and thus, have not reduced their spending.
Over the past two years, the average rate on new 30-year fixed-rate mortgages has soared to over 7%, while the average rate on all outstanding mortgage debt, including existing loans, has only slightly increased to 3.6% in the second quarter of this year from 3.3% a year earlier. This marginal increase is hardly noticeable.
The Federal Reserve cannot simply accept this defeat. In order to have an effect on the economy, it raises rates higher and for a longer period of time than it would need to if all mortgages had adjustable rates. However, these significant rate increases eventually harm business investment, which is crucial for long-term prosperity. John Campbell, an economist at Harvard, explained that these rate hikes negatively impact interest-rate-sensitive sectors.
Furthermore, fixed-rate mortgages introduce other issues. Less informed borrowers are slow to refinance when rates drop, while fixed rates disproportionately benefit wealthier individuals who are more knowledgeable about the mortgage market. Additionally, fixed rates can destabilize the financial system, as banks hold mortgages that lose value when rates rise. Although most banks now sell off the majority of their mortgage loans, some still expose themselves to rate risks by purchasing mortgage-backed securities.
Another downside to fixed rates is the phenomenon known as “rate lock,” where homeowners who want or need to sell their homes abstain from doing so because they do not want to trade their 3% interest rate for a 7% interest rate. This decreased societal mobility has macroeconomic effects, such as people rejecting job offers in other locations, ultimately impeding productivity.
Taking a closer look at rate lock, it initially appears to decrease existing-home sales and increase sales of new homes, as buyers who cannot find an existing home due to hesitant owners flooding the market for new construction. However, on further examination, rate lock seems to have no overall effect on the availability of housing since rate-locked individuals are neither selling nor buying houses. Yet, on third glance, rate lock does indeed disrupt the housing market. Robert Dietz, the chief economist of the National Association of Home Builders, explained how the decline in existing homes for sale due to rate lock complicates the matching process for home buyers. In May, the inventory of existing homes for sale was less than half of its average since 1999.
This raises the question of whether U.S. policies favoring fixed-rate mortgages should shift towards being more neutral or openly favoring variable-rate loans. John Campbell proposed a shift towards the Canadian system, which has fixed mortgage rates for only five years. He believes this change would make monetary policy more effective and promote a more stable banking system.
Lisa Sturtevant, the chief economist of Bright MLS, argues that fixed-rate mortgages are beneficial as they increase homeownership rates and serve as a hedge against rising inflation. On the other hand, Campbell contends that adjustable-rate loans expose homeowners to tighter monetary policy, but from an economic management perspective, this is an advantage rather than a disadvantage. He also notes that most people are shielded from higher rates due to rising incomes during periods of economic growth. Campbell suggests that fixed-rate loans make the most sense for individuals living on fixed incomes.
While adjustable-rate loans have been criticized for luring homeowners in with low initial rates and subsequently burdening them with higher rates, Campbell agrees with the criticism of teaser rates and opposes their use. Conversely, when an appropriately high initial rate is set, it will potentially decrease over time if the economy slows down, unemployment rises, and the Fed cuts interest rates. This adjustment occurs automatically, without the need for refinancing that fixed-rate mortgage holders must go through.
Overall, fixed-rate mortgages do not deserve the unwavering support they receive in the United States. However, Americans are not yet ready to abandon fixed-rate mortgages. It would be beneficial for the country to at least consider alternative approaches and perhaps move towards a more neutral or variable-rate loan system.
Denial of responsibility! VigourTimes is an automatic aggregator of Global media. In each content, the hyperlink to the primary source is specified. All trademarks belong to their rightful owners, and all materials to their authors. For any complaint, please reach us at – [email protected]. We will take necessary action within 24 hours.
