Construction and sales of new homes have soared, even as sales of existing homes have entered a deep freeze:
Between mid-2022 and earlier this year, existing home sales fell from an annualized rate of almost 7 million sales per month to just 4 million, a record pace of contraction and an overall drop in magnitude only slightly shy of the 2008 financial crisis. There are currently only about 600,000 homes on the market, compared to 1.5 million before the pandemic. Prices remain close to record highs, but given such thin liquidity, are virtually meaningless.
The freeze in transactions is a function of interest rates.
Homeowners borrowed and repriced about $3trn worth of mortgage debt (half of the entire outstanding amount) in 2002-22—either through purchases or refinancings—at emergency-level low interest rates. Today, one third of mortgage debt carries an interest rate below 3%.
Contrast that with the going rate on a 30-year fixed rate mortgage: at the time of writing, above 7%. Since existing homeowners can’t ‘port’ their mortgage to a new home, or sell it to the would-be buyers of their home (except in rare circumstances), moving houses entails losing a cheap mortgage and resetting at a much higher rate. Borrowers are “locked-in” by the golden handcuffs of their cheap mortgages.
This dynamic has always existed in the US housing market, but—given the swing from rock bottom rates to the highest borrowing costs in a generation, and in such a short amount of time—this mortgage lock-in effect has never been so strong.
A mortgage originated at a lower rate than prevailing rates is worth less than par—this is an unrealized loss to the lender and an unrealized gain to the borrower. Unsurprisingly, pandemic-era borrowers are unwilling to lose their collective $700 billion worth of these gains.
[…]
Mortgage lock-in prevents home prices from adjusting to the shock of higher financing costs. This is, in particular, a burden for the ~2 million Americans who are first time home buyers every year. Millennials are the biggest cohort of buyers these days, and in 2022, 70% of them were first time buyers.
The sprawling edifice of American intervention in the mortgage market—from the Federal Housing Administration (FHA), to the government-sponsored enterprises (GSEs) like Fannie Mae, Freddie Mac, and Ginnie Mae, to Federal Home Loan Banks (FHLBs)—are premised on the goal of making home ownership more widely available. But amidst rising rates, mortgage lock-in is an impediment to achieving that goal.
If the stickiness of the asset is a problem for prospective first time buyers, the inflexibility of the liability is a problem for existing owners. Aside from locking owners into their current homes, the rigidity of mortgages in the face of rising interest rates means that an increasing number of borrowers are ‘underwater’ or very close to it—they hold a mortgage that is close to, or exceeds, the value of their equity in their home.
[…]
Mortgage lock-in also has less obvious but more harmful, widespread, and long-lived effects. Not least: it exacerbates declining levels of geographic mobility. Americans are staying in their homes longer. They are evincing a declining willingness to move neighborhoods, cities, or states in order to find work that better matches their skills. By giving Americans a powerful incentive not to move, mortgage lock-in contributes to a handful of modern-day macroeconomic problems, including anemic productivity growth and neo-feudal levels of income inequality.
[…]
Mortgage lock-in doesn’t exist in Denmark because borrowers can buy back their loans at market prices in the secondary market.
[…]
In the US, banks originate mortgages but then sell them onwards to GSEs for bundling into mortgage backed securities. But Danish mortgage finance operates on the ‘balance principle’: bank lending is funded by the issuance of bonds which precisely match the cash flows of the underlying mortgages. Danish banks retain ownership of mortgages, including their credit risk. These remain on their balance sheets within ring-fenced ‘cover pools’.
Securitization of these assets is not via mortgage backed securities but instead via ‘covered bonds’. Cash flows pass directly from borrowers to covered bond investors, with the mortgage bank acting as servicer.
Covered bond investors are highly secured: they have exclusive recourse to the segregated cover pool of assets on the issuing bank’s balance sheet, and (nonexclusive) recourse to the overall assets of the issuer.
Danish mortgage banks are specialized institutions that only issue and distribute mortgages without maturity transformation (a form of narrow banking). They are barred by law from taking deposits.
The balance principle and generally tight regulation ensure a very stable market—since its creation in 1797, the Danish covered bond market has not experienced a single default in a bond series.
The allowance for repurchases below par is facilitated by the fact that Danish mortgage-backed bonds are pure pass-through securities: each specific mortgage can be traced directly to a bond that is traded in the secondary market. This means that when a mortgagor wants to terminate the loan, it is possible to identify the bond it was financed through and buy back an equivalent portion at the prevailing market price.
So, the Lord giveth, and the Lord taketh away.
The political class gave cheap mortgages in the pandemic era; now those have been taken away. Someone has to pay, and there is grumbling.
”…the inflexibility of the liability is a problem for existing owners. Aside from locking owners into their current homes, the rigidity of mortgages in the face of rising interest rates means that an increasing number of borrowers are ‘underwater’ or very close to it—they hold a mortgage that is close to, or exceeds, the value of their equity in their home.”
This doesn’t seem correct; the low mortgage relative to current rates makes their house worth more; cashing in means the homeowner will have less, the bank currently holding the mortgage will have more.
And the Danish system just seems like a different shell game: if a bank wants to sell the current, low API mortgage, they are still selling an undervalued asset. What they want to do is cancel the mortgage and reissue it. They don’t get this under the Danish system.
”Mortgage lock-in… exacerbates declining levels of geographic mobility. Americans are staying in their homes longer. They are evincing a declining willingness to move neighborhoods, cities, or states in order to find work that better matches their skills. By giving Americans a powerful incentive not to move, mortgage lock-in contributes to a handful of modern-day macroeconomic problems, including anemic productivity growth and neo-feudal levels of income inequality.”
I’m not so sure about this line of thinking. Seems more of the autistic economics we get today from certain segments: life as one big harvesting/raiding adventure where we travel around picking up money lying on the ground. Seems one should be able to stay in place and make an acceptable living with their skills and labor.
Everyone likes to pretend that unrestricted population flows are such a grand idea, but no one ever deigns to explain what makes unrestricted population flows such a grand idea.
In the real world, the number-one thing that States could do to improve the lives of their citizens would be to control ingress according to social but not economic factors such as age, sex, race, religion, brains, feminine sex appeal, and so on. There are fifty States and therefore fifty opportunities for experimentation: a State for every kind.
Everyone understood this to be constitutional and unobjectionable and expected until the Supreme Court suddenly found in 1941 a new power for 152 years theretofore unknown, that it was somehow an intolerable “burden on interstate commerce” for a man to, without pay and on his own dime, bring his wife’s indigent brother to California in contravention of California criminal law, and that, therefore, the Congress, seated two thousand miles away, had an expressedly absolute power to dictate the most essential question of any state to any State, and an impliedly unrestricted power to move around massive numbers of de facto or de jure wards of the United State wherever and whenever at pleasure.
https://scholar.google.com/scholar_case?case=6778891532287614638
*that it was somehow an intolerable “burden on interstate commerce” for a man to be forbidden by California criminal law to bring his wife’s indigent brother to California notwithstanding that he did so without pay and on his own dime, and that, therefore
LOL would love to see the author of this piece explain the ECB’s zero bound, and at one point negative, interest rates on business bonds. It is all improperly evaluating and pricing for risk, but it will be fun to read.
”…until the Supreme Court suddenly found in 1941”
Wow. The rot was already deep in 1941.
At least the majority opinion was honest, noting that such migration could destroy the country, but at least we will be destroyed equally and together.
Justice Jackson was moved to note that states could still stop criminals. Wondering his thoughts on illegal aliens having more access to resources of the nation than current citizens.
And “muh freedom” they were so worried about in 1941 seems mostly gone. We’ve got armed guards turning us away from most public facilities; parks and other public space have been ceded to drug cartels and the ghetto cohort. I’m otherwise stopped and bothered for driving the wrong speed; not having proper documentation, or mechanical integrity, of my vehicle. A large chunk of my effort goes to maintaining the tax and insurance status of my property, so it is not taken from me and turned into a refuge and resource for migrants, etc.
Today, the rot is bone-deep; in 1941, ‘twas only skin-deep.
“Loss of freedom” is but the visible, acute symptom of what happens when you bodily replace the nation and government of Protestant Anglo-Germanics, by Protestant Anglo-Germanics, for Protestant Anglo-Germanics, with the children of aliens and peasants and natural slaves. U.S.-sponsored Somali ethnic cleansing of Swedes in Minnesota is a difference only of degree—not of kind—from U.K.-sponsored Irish ethnic cleansing of the sons of liberty (Massachusetts) in Boston.
Such is life when your government is in form and function a sprawling for-profit monopoly corporation monomaniacally dedicated to the grand plan of mixing and matching and fixing and smashing your bones into meal so as to best counter incipient insurgency and Deliver Shareholder Value.
Imagine going back in time, and telling President George Washington that, under the new Constitution, Boston would become an Irish city.
“There are Irish in Boston? Why are there Irish in Boston?” (George Washington, 1793)
“There are Irish in Boston? Why are there Irish in Boston?” (George Washington, 1793)
What is the source for your quotation? As far as I know, there was a significant Irish population in Boston well before 1776, and Washington knew there were a lot of them in the Continental Army certainly by 1780, when he made St. Patrick’s day his troops’ only holiday that winter, probably even before the St. Patrick’s Day 1776 battle of Bunker Hill, when he made “St. Patrick” the password.
See for example:
https://www.mountvernon.org/george-washington/religion/a-brave-and-generous-people/
Were you just making up something you imagine Washington might have said? If so it’s contradicted by history.
For the Protestants, their religion long dead, the Catholics are the eternal enemy.
Protestants won Christendom in Queen Anne’s War in 1707.
You will note Christendom now…is gone.
Indeed, it’s all quite gutted, sold, mortgaged, leveraged. But one must protest to be a protestant.
Even against ghosts.
But at least the Church and its prohibitions about usury are out of the Way!
This has all the glamour and justice of the Spanish Anarchists digging up the corpses of nuns and putting them on trial during the Spanish Civil War.
Indeed, the Left are the last of the Protestants.
Protestants broke from Catholics along ethnic lines because Protestantism is an ethnic phenomenon. “Protestants” are a big-tent ethnic group, more commonly known as “white people”. The Protestant spirit will die when the children of Protestants die bodily and then only. Degeneracy is in the blood. If Noel Ignatiev can recognize that, so can you.
Irish Presbyterians and Irish Catholics are two very different races of man. I can tell a “Scots-Irish” from an “Irish” at fifty paces on sight alone, as can any competent analyst.
Imagine this scene, but instead of Romans, it’s Americans.
https://www.youtube.com/watch?v=qmFhsts8WC4
“Americans? Where are they now?” “You’re looking at them, asshole.”
Before anybody grab their pitchforks and hemp rope and accuse me of hyperracism and maybe that F&G ADLSPLCutout spook often known as white nationalism, permit me to clarify that I am, in fact, a multiculturalist.
https://www.youtube.com/watch?v=FyZ7Q-ruVpo
If you are a colored person, I love having you around. Cross my heart and hope to die / Stick a needle in my eye.