HousingWireHousingWire
Mortgage market conditions presented over the past two years have muted the effectiveness of the monetary policy tightening by saving $600 billion for homeowners, accounting for about 2% of personal consumption spending since 2022, according to a report by two Swiss Re Institute senior economists.
“A dollar not spent on mortgage payments is a dollar free to spend elsewhere. This helps explain why recent policy tightening did not, initially, appear to slow the economy,” Mahir Rasheed and James Finucane wrote in the report, which was published on Monday.
In 2020 and 2021, during the COVID-19 pandemic, the Federal Reserve’s easing monetary policy led to homeowners locking their mortgages at historically low rates for 15 or 30 years.
But when the monetary policy changed in spring 2022 due to persistent inflation, the market mortgage rates exceeded the average rate borrowers paid on existing mortgages by as much as 3.2 percentage points, the economists said.
To illustrate, the Federal Open Market Committee raised its policy rate by 425 basis points in 2022 and by 100 basis points in 2023, holding rates at their current range of 5.25% to 5.5% since July 2023.
As a result, by the end of June 2024, the market rate for mortgages was near 7%, compared to an average existing mortgage rate of about 4%. In total, 95% of US home loans are 15- or 30-year fixed-rate mortgages, and more than half still pay less than 4%.
“We reviewed this gap for the two years through the second quarter of 2024 and estimate that homeowners with fixed-rate mortgages amassed over $600 billion in ‘savings’ from their mortgages in the post pandemic expansion, amounting to nearly 2% of personal consumption spending,” the economists wrote.
According to the analysis, the mortgage lock-in effect has supported strong consumer demand when rates were rising and will counteract the effectiveness of the Fed’s rate cuts, expected to begin in September. That may lead to officials having to cut rates more aggressively than the baseline estimates, the economists said.
“Most mortgage borrowers will continue to make the same mortgage interest payments, with limited motivation to refinance or prepay. This informs our view that there is limited upside to GDP growth over the next 12 months,” Rasheed and Finucane wrote.
