Art Wager
Interesting dynamics have played out in the housing market since the Federal Reserve began raising interest rates to counter inflation. Some of these trends even go back further to the onset of the coronavirus pandemic, when the central bank dropped rates to zero at the same time people were seeking more space and lifestyle changes. The resulting effects have led to an increasingly expensive environment for housing and rent, and have even triggered an affordability crisis across many markets.
Location, location, location? Higher borrowing costs steepened the price of new construction, while supply is short due to the many real estate investors who have clamored into the sector. Landlords have also raised rents to keep up with the inflationary environment, and many retiring baby boomers are still living in their homes rather than downsizing or moving to retirement communities. However, one of the biggest cost drivers is called the “lock-in effect,” where people who locked into ultra-low interest rates before 2022 cannot move between markets or make traditional financial changes, which would increase liquidity and free up supply.
There have been many creative solutions to the current state of affairs, some of which are common across Canada, Australia, parts of Europe, and elsewhere. One of them is mortgage assumability, or where new owners of a house “assume” the mortgage terms of the seller (with full coverage of existing equity), and it already happens in the U.S. on a minimal scale with FHA and VA loans. A more touted remedy is mortgage portability, which permits buyers or sellers to simply “port” their existing mortgage terms to a new location and could really make a dent for both buyers and sellers of a transaction.
Possible in America? Land ownership in the U.S. is recorded and held at the local level, making things complicated if porting a mortgage to a different state, or even to a different county. Another factor is that the majority of mortgages are securitized and bundled with other sales, making it difficult to alter statements and terms, especially if things aren’t mitigated by origination premiums, a higher percentage of variable rates, or larger down payments. While there is appetite for new solutions, any major structural changes to the U.S. mortgage market would likely have to take place in Congress, as well as revamping entire systems that are currently in place for lenders and investors of mortgage-backed securities.
