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The Morning

The New York Times
December 1, 2022

Good morning. The increasing cost of living means that many homeowners in the U.S. can’t leave their homes and some in Britain may not be able to stay in theirs.

Quadruple whammy

Economic policymakers around the world are raising interest rates to try to tame the rising cost of living. Jerome Powell, the Federal Reserve chair, reiterated his commitment to that policy in a speech yesterday. He warned against giving up on inflation “prematurely” and promised to “stay the course until the job is done.”
But both rising rates and high inflation can have very different practical effects depending on who you are and where you live. Gas prices matter much more to people who commute long distances to work, for example. Higher interest rates are costly to people who rely on credit cards to pay their bills, while they can actually be good news for retirees living off savings.

In today’s newsletter, I want to explore a striking example of those differences: the housing market on either side of the Atlantic. In Britain, rising rates are threatening to force some people out of their homes. In the United States, they are in some cases preventing people from moving.

Two countries, two outcomes

At the beginning of this year, the typical U.S. home buyer could get a mortgage with an interest rate of just over 3 percent, low by historical standards. Today, buyers can expect to pay more than twice that in interest — more than 6.5 percent on average, the highest rate in over a decade. To put that in concrete terms, for someone buying a $300,000 home with a 20 percent down payment, that’s the difference between a monthly mortgage payment of $1,000 and a payment of more than $1,500.
If you own a home in the United States, though, chances are your monthly payment hasn’t gone up at all. That’s because a vast majority of homes in this country are bought using 30-year, fixed-rate mortgages. If you locked in a rate of 3 percent last year, your monthly payment will stay the same for the next three decades, no matter what happens with interest rates, home prices or overall inflation.

In Britain, mortgage rates have also risen rapidly. But the impact of higher rates looks very different. That’s because most mortgages there have fixed rates for only two to five years. (Others have variable rate mortgages that automatically change whenever the Bank of England raises or lowers interest rates.) As my colleague Eshe Nelson reported recently, millions of Britons expect their interest rates to jump up over the next year. Inevitably, some of them won’t be able to afford the resulting higher payments, and will be forced to leave their homes.

Winners and losers

There’s no question that, for most U.S. homeowners, the stability that their fixed-rate mortgages provides is a huge benefit right now, effectively insulating them from both the effects of high inflation and rising mortgage rates.
But not everyone comes out ahead. In the U.S., you can’t take your mortgage with you when you move to a new home. As a result, homeowners who might have been planning to relocate over the next few years — to trade up to a bigger house, for example, or to downsize after the kids head to college — now have a strong incentive to stay put and hold on to their low interest rate.

As a result, fewer people are listing their homes for sale, which in turn is keeping home prices high even as the housing market has slowed by other measures. That means that anyone hoping to buy a first home now faces a quadruple whammy: There aren’t many homes to buy. The homes that are available are expensive. Rising interest rates are sapping buyers’ power. And if they don’t buy, then they have to keep paying rent — which is also going up.
As Roman Sustek, an economist at Queen Mary University of London, put it to me: “In the U.S., you’re going to have winners — these are the guys with existing loans — and you’re going to have losers, who are the new borrowers. In the U.K., everyone is going to be a loser.”

These complex dynamics also have implications for the broader economy. The prevalence of fixed-rate mortgages in the U.S. means that the Fed can raise rates aggressively without worrying that millions of people will lose their homes. But it also dampens the effect of those rate increases: If U.S. homeowners were to face a sudden upturn in their housing costs, they’d be likely to pull back their purchases in other areas (something that is already starting to happen in Britain). Instead, many Americans can keep on spending, which could help keep inflation higher for longer.