When the contractor finally gave us his bid for a long-awaited major house renovation, my husband gazed upon the bottom line with awestruck eyes. They quickly turned haunted as he raised them to mine.
“Why don’t we just move?” he asked hollowly.
As the household member in charge of financial projections, I already had an answer to that question. “Mortgage rates,” I said. “It would cost us even more to buy a house in decent shape.”
You see, in 2014, we had refinanced to a 15-year mortgage with a 3-percent interest rate. Mortgage rates have now risen more than a full percentage point; if we moved, our monthly payment would climb by hundreds of dollars a month. Add in the cost of selling a house, and the financial logic was clear: It’s better to renovate than to buy anew.
We are obviously not the only people in that position. In 2007, the median time spent owning a house was just four years. Now, it’s more than a decade. And as the Federal Reserve continues to tighten, that number will likely grow. Which will pose some novel problems for the housing market, and for the broader economy.
The housing bubble’s collapse a decade ago, and the financial crisis that followed, were devastating for millions of homeowners. But for people who managed to hang on to their homes through the crash — or luckier still, to buy that first house while the market was bottoming out — the years since have been particularly good. To keep the economy from completely disintegrating, the Federal Reserve dropped interest rates to near zero and kept them there for years. Mortgage rates followed, and homeowners like me eagerly refinanced into lower mortgage payments.
But that party began to wind down a couple of years ago. Initial jobless claims are lower than they’ve been since the late 1960s, and the unemployment rate is testing similar lows. The Federal Reserve has duly noted those things, and tightened accordingly. The federal funds rate, the benchmark that banks use in setting interest rates for other kinds of credit, is at 2.19 percent, as of Oct. 17. And mortgage rates have lurched up accordingly.
For those who locked into fixed-rate mortgages a few years back, that’s largely irrelevant news — unless we want to move. At which point it quickly becomes important, indeed, not just to us, but to people who might like to buy our house. Rate lock-in makes not just upsizing, but downsizing, considerably more expensive, reducing the natural rate at which housing markets churn.
That wouldn’t matter if new housing was coming on to the market to compensate. But it’s not. Caution from developers, urban planners and bankers means that new construction isn’t taking up the slack. After a decade of recovery, housing starts are barely above where they bottomed out during previous economic cycles.
No wonder you’ve probably read — more than once — that millennials are unable to buy homes. And you’ve probably heard it blamed on McJobs and crushing student loans. But real median household income is higher than it has ever been, and the effect of student loans on homeownership is pretty modest. The charts above are probably the most important, and arguably the least talked about, part of the story: Even with their finances stabilizing, young people can’t buy houses that aren’t on the market.
Yet, even happy renters may feel the impact of a generation of homeowners stuck in place. The willingness of Americans to pick up and move has long been a strength of the U.S. economy. It tightens drooping local labor markets, reallocates workers to more productive sectors and stitches many disparate local and regional economies into one functioning national market. If it weren’t for American labor mobility, we’d have more of the problems that cropped up in the euro zone over the past decade, where the disconnect between disparate regional economies created a series of fiscal and monetary crises.
Unfortunately, American labor mobility was declining well before the housing crisis, thanks to a variety of factors. And interest rate lock-in seems likely to make the problem even worse.
That isn’t to say the Fed shouldn’t tighten. No matter what President Trump thinks, we’ve obviously recovered from the financial crisis, so we ought to move on from crisis-era monetary policy.
But as we do, we need to be conscious of the choke points that rising interest rates will create in housing and labor markets, and find policies that can offset them. The obvious place to begin is with housing starts. If middle-aged folks such me are clinging to their current homes, making it cheaper and easier to bring brand-new houses into the market becomes even more imperative. Policymakers need to find ways to relax the local restrictions that make building so difficult, and to ease the transportation bottlenecks that make it harder and harder to open new land at urban peripheries. Otherwise, we may all end up locked into an economy that’s less than it could be.