MainStreet Macro: Under lock and key

I vividly recall the first time I received my keys as a new homeowner. I was in a conference room with my new husband, our real estate agent, the seller, his new husband, and his real estate agent.

I remember the seller passing the keys to me. In that moment, I became a homeowner.

That was nearly 20 years ago. Today, mortgage rates are at a 20-year high, fewer homes are on the market, home prices continue to increase steadily, and moments like the one I had all those years ago are out of reach for more and more would-be homebuyers. ­­­­

But it’s not just buyers feeling the pain of today’s rising-rate environment. Homeowners, too, are being pinched in ways that are rippling into the labor market and broader economy.

Rate lock

In 2020, the Federal Reserve cut interest rates to stave off recession as pandemic shutdowns put the brakes on the U.S. economy. The move drove mortgage rates to their lowest level in five decades. It was a golden time for homeowners, many of whom were able to refinance their mortgages to take advantage of rock-bottom interest rates. 

By the end of 2022, the median interest rate on outstanding mortgage debt is around 3 percent. Ninety percent of mortgages carried interest rates of less than 6 percent.

In contrast, the cost of an average 30-year, fixed-rate home loan was 7.31 percent at the end of September, according to mortgage purchaser Freddie Mac.

This rapid run-up in financing costs has created a new kind of homeowner: People who don’t necessarily love their house, but have deep fidelity to their cheap mortgage. With fewer owners selling, the inventory of existing homes for sale is down 14 percent from a year ago, according to the National Association of Realtors.

Cashing out

Even homeowners who love their houses and have no intention of selling are being affected by rising mortgage rates. The combination of steadily rising home values and costly loans means more U.S. housing wealth is being locked up, out of reach.

When the pandemic began, U.S. homeowners had about $20 trillion in home equity. That wealth has surged more than 53 percent in just three years, reaching more than $31.6 trillion in the first half of 2023, according to data from the Federal Reserve.

Historically, Main Street homeowners flush with home equity could tap their housing wealth to fund other spending, pay down other, more costly debt, or finance their small business operations.   

But the once-common practice of refinancing into larger loans with lower rates – a cash-out refi – has all but ended. Cash-out refinancings fell 73 percent from 2021 to 2022 as mortgage rates rose, according to the Consumer Financial Protection Bureau. The slump has continued in 2023, with refinancing applications down roughly 25 percent last week from the same week a year ago, according to the Mortgage Bankers Association.

New debt

While all that home equity lies unused, trapped by higher rates, Main Street is facing new debt challenges. Credit card debt hit its highest level on record – $1 trillion – in the second quarter of 2023, according to data from the Federal Reserve Bank of New York. And student loan payments are restarting this month after a three-year hiatus.

Last week, government data showed the U.S. household saving rate is 4.3 percent, less than half of its historical average. That translates to less savings to fund spending and manage debt in the future.

My Take

With housing wealth under lock and key, Main Street employers are facing a new vulnerability.

Workers’ willingness to move to where the jobs are has been a defining feature of the U.S. labor force. It’s one reason the U.S. labor market has been more dynamic and robust than those of other advanced economies.

In recent decades, however, worker mobility has been on the decline.

In 1948, 1 in 5 people in the U.S. moved to a different residence, according to Census data. By 2018, that share had dropped by half, to approximately 1 in 10 people. In 2022, only 8.7 percent of people in the U.S. changed where they lived.

Worker mobility could fall even more as higher interest rates, high home prices, and increased opportunity for remote jobs give people less incentive to move.

As fewer house keys are passed from sellers to buyers, employers are losing their ability to tap into a mobile workforce.