Fixed-rate mortgages are rent control by stealth

CONTEXT NEWS Average 30-year fixed mortgage rates in the United States rose above 7% on September 10 for the first time in more than a year, according to Mortgage News Daily. As of September 16, they were 7.24%. Tensions surrounding the Strait of Hormuz and signals from Federal Reserve officials have led long-term borrowing costs to rise. The author is a Reuters Breakingviews columnist. The opinions expressed are his own. By Jon Sindreu LONDON, Sept 17 (Reuters Breakingviews) - Contrary to what US President Harry Truman used to complain about, economists do tend to agree on something: opposition to rent controls. Policy wonks argue they reduce housing supply, raise prices for non-controlled units and discourage people from taking better jobs. Yet many of the distortions attributed to the rent freezes championed by New York Mayor Zohran Mamdani and several European leaders can also be laid at the door of the fixed-rate mortgage. The share of Americans seeking primary residence is near record lows. According to the Survey of Consumer Expectations, the average respondent sees only a 13% chance of moving next year. One reason is that three-quarters of households can only afford a home under $300,000, yet the median price is near $400,000. The other is that the cost of borrowing is high. The average 30-year mortgage rate has risen above 7%, according to Mortgage News Daily. But even buyers who could afford to put their homes up for sale have loans foolish to discard. Though the stock of mortgages with rates below 4% is shrinking fast, roughly half of American borrowers still have them, and only around one-fifth pay above 6%, Federal Housing Finance Agency data suggests. Households prefer owning to renting because it insures against rising costs. It's also why, since the 1990s, many governments softened the pace of rent increases. Now, the affordability crisis has revived harsher interventions, like Mamdani freezing rents on rent-stabilized apartments and Spain imposing absolute rent-increase caps. Research finds that fixed-rate mortgages leave households similarly "locked in," reducing listings and sales. A recent model by Kristopher Gerardi, Franklin Qian, and David Zhang estimates that average US house prices would have been about 8% lower between 2022 and 2023 had this effect not been present. One possible reason is that fixed-rate mortgages prevents some owners from selling and becoming renters, removing supply without an equal reduction in demand. Younger borrowers, who tend to want to move toward higher-income neighborhoods, are the most impacted. Nations like Sweden and Australia run perfectly well on variable rates. Yet most officials tend to favor insulating people from sudden borrowing cost shocks. By guaranteeing mortgage-backed securities, US agencies like Freddie Mac sustain demand for fixed-rate mortgages. There are ways to curb the deleterious effects. Last year, the Trump administration studied making mortgages "portable," as in Canada and Britain. The Danish model allows for a "delivery option" to retire debt at market value. Under these scenarios, lenders would charge more. If the alternative is a mass form of rent control, however, it may be worth the cost.

Fixed-rate mortgages are rent control by stealth

Context on mortgage rates

Fixed-rate mortgages lock in homeowners

Housing affordability and mortgage lock-in

Research, policy responses and alternatives

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