00:00:00
the fact that an individual does not put their
house up for sale basically causes these Ripple
00:00:04
effects for other people who depend on the market
being liquid um and that uh certainly can affect
00:00:10
people's ability to move to a certain place
to find the right house right there may be um
00:00:14
certain types of housing as single family housing
may be particularly difficult to obtain and that's
00:00:20
what you certainly need if you want to relocate
for a job far away we think of that as like an
00:00:24
important externality which is why policy should
look into it in the first place is that these are
00:00:29
not individual decisions that the individual can
resolve they may actually affect lots of other
00:00:33
sellers and buyers welcome to the ripple effect
the podcast that takes you on a journey through
00:00:38
the minds of Wharton faculty I'm your host Dan
Looney and in each episode we'll be diving deep
00:00:44
into the inspiration behind the groundbreaking
research that Wharton professors have conducted
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and exploring how their findings resonate with
the world today well we have seen a very active
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housing market in the last few years obviously
the impact of the pandemic and now what's going
00:00:59
on with the economy and within the housing market
there's been something called mortgage lockin it
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basically started when we were during the pandemic
and we saw interest rates and mortgage rates sink
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to down around 3% but then as we've come out of
the pandemic and now into the economy we see now
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mortgage rates more around 7% well in many cases
people who have that 3% rate don't want to give
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it up for a new home or they're going to have to
pay 7% and that brings an interesting Dynamic to
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the housing market as we move forward pleasure
to be joined here in Studio by L Leu who's an
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assistant professor of Finance here at the Wharton
School great to see you thanks for coming in thank
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you so much for having me this is just it's such a
unique Dynamic I think when you talk about housing
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in general that when this first happened it almost
felt like it was opening a door to opportunity
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for so many uh homeowners back a couple years
ago so the low rates certainly did right so um
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there's an image that's been that's been going
around of mortgage lock in as golden handcuff
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so the fact that you've got a 3% rate locked in is
good for you it's golden right it's a golden thing
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to have but the issue that we're discussing today
is that it also locks you into your current house
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so people have not been moving they've not been
selling their house and that can lead to issues uh
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down the line and as we see today and so that can
have an impact not only with the individual who
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owns the home but when you think about as you said
them not moving maybe they're not changing jobs
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then that has an impact on the companies that they
are either working for or potentially would be
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working for absolutely um it has it has an impact
on uh on possibly firms and hiring and moving it
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also has an immediate impact on the housing market
itself so you as you know somebody with a 3% rate
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locked in you don't want to put your house up for
sale but actually the market functions much better
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when people when there is a constant kind of
coming and going of inventory coming up for sale
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so that other people who want to move to where
you live can also move there and so I think the
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the fact that we've not seen that the fact that
housing transactions have basically dropped by
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30% relative to last year um housing transactions
have fallen off a cliff they're almost at post
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crisis basically Pro great financial crisis levels
means that um new home buyers as well as people
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who would like to move actually also find it very
difficult to find a house that's up for sale so
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how do we turn that around and get us back towards
a more normal housing market where you have a lot
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of that trend transactional movement so that's a
great question and challenge I think for policy
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makers today um so if you remember the State of
the Union addressed by the Biden Administration
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actually proposed because they saw it as such
an issue that first time buy buyers cannot enter
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the housing market um they proposed a $10,000 tax
credit to people who own starter homes so defined
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as people who own an um relatively low priced
homes in a given County um and and when we when
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we looked at that proposal I think one challenge
is that there's basically um a housing ladder in
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the housing market so if you own a stter house
and the Biden Administration gives you $10,000
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to sell it you need somewhere else to move you
want to buy from someone right and that someone
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is likely right if you're moving up if you're
in a starter home and you you know you want to
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expand your house you may be moving into a more
expensive or a larger house and so you are likely
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to buy from someone who's likely also locked in
also got a 3% mortgage right and so how are you
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going to convince them to sell to you well maybe
you're going to agree to pay a higher price right
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and so part of that tax credit is going to go to
people with larger homes that's one way to split
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it and the other the other challenge there is that
we think 10,000 US dollars is probably not large
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relative to how valuable the low rate is for you
so we estimate that on average for the average US
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morgage borrower that's about the the the fact
that you've got a three or 4% rate locked in on
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average is worth to you about 50,000 us so 10,000
is is maybe not enough to convince one person to
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to sell let alone two um so that's one challenge
obviously we're also not saying you should just
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raise the tax credit and just throw money into the
housing market right these kind of subsidies can
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be inflationary right by themselves and so there's
there's an additional challenge with policy trying
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to stimulate the housing market without causing
inflation which would be entirely uh counter uh
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counteractive because um that that would cause
rates to stay higher for longer and lock people
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in for even longer so that's a real there's a real
policy conundrum how much do you think then that
00:05:37
that the the run that we've had on inflation
the last couple years has played a role into
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this I mean obviously there's the component of the
price runup we've seen in properties over the last
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couple years as well people that you know had a
house valued at $300,000 pre pandemic probably saw
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what between 50 and $100,000 depending on the size
of the house extra value in their home in just a
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couple of years that's right so that's certainly
um there's there's you know there's been pandemic
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factors in the past that I think have led to an
increase in inflation I think going forward the
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challenge the policy challenge for for instance
monetary policy makers is the idea of raising
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rates right which is why mortgage rates are so
high today the goal was to dampen inflation yeah
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but what we just discussed these are in the labor
market as well as in the housing market these are
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actually two factors caused by lockin that may if
anything be inflationary right we're not putting
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our houses up for sale we're also not buying but
I think there's it seems to the lack of liquidity
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and and inventory seems to generate upward price
pressure so house prices have remained really
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remarkably High given that rates are so high
as well as yeah maybe you have to compensate
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for instance firms and and workers right to
in in order to move maybe you have to maybe
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you have to offer um part of the compensation
package you may have to entice someone to pay
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a bit more so there's I think risks around lockin
where the policy maker policy has raised interest
00:07:02
rates but actually there may be effects that are
inflationary coming coming through lock in what's
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interesting right now is you know we're looking at
rates at around 7% and I think people are trying
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to figure out where that sweet spot is that'll
really start to drive a lot of activity you know
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do you do you need to get rates on average down
closer to 6% 5 and a half whatever that number is
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in order to have people thinking okay now I feel
like that level of value between the mortgage I
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have and the one I would take is close enough
where I don't feel like I'm I'm putting myself
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in a bind that's certainly true I don't think
there's a magic number even though maybe people
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have these kind of thresholds in mind like I'm
looking I'm waiting for it to hit 5% yeah what
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we would say as economists is basically like it's
very difficult to time exactly when rates come
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down and rates they they may stay higher right
there that's that's been a surprise in the latest
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inflation news um and so you shouldn't you should
make you should make your decisions based on your
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personal circumstances and so um there's obviously
um typically there's an option to refinance if
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rates come down so that's a way to if you even
if you had to take out a mortgage rate today
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at higher rates you can refinance down obviously
there's a cost involved with that and you have to
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make sure there's no prepayment penalty so that's
maybe like more practical advice but you should
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definitely not try to time the market I think
that's I think that's very difficult to do given
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that yeah given that we we don't see a super clear
path well and and I guess to a degree the market
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that a person is in has to factor in here as well
when you think about you know the value of a home
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in Montana or Utah or North Dakota is going to
be a lot different most likely in many cases to
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what you know we see here in Philadelphia or New
York or Chicago and that to a degree I guess also
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brings me to the question about if there is kind
of an incentive put forward by the government to
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try and ease this lock in is it better to have it
at the federal level or do you need to have some
00:09:04
combination with the state and local governments
coming in as well because of that difference in
00:09:09
cost and value absolutely so that's that's what
we're hoping to tackle and new research is try
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to kind of model the housing market with this
kind of housing ladder and different types of
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Housing and different prices in different regions
so you may have to really finely calibrate any
00:09:24
such intervention an alternative intervention
that we also want to highlight and I think p
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push promote of going forward is um there
are actually ways in which you can unlock
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the market through mortgage contracts so you
so in some countries it is actually possible
00:09:40
to take your mortgage with you when you're moving
the rate and exactly take the rate with you take
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the rate exactly take the mortgage and the rate
with you and the friction right now in the US is
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that basically you as the you as the borrower
you could you would ideally want to go to your
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bank and maybe renegotiate and ask them for you
to Port the mortgage or maybe take some part
00:09:57
of the rate uh keep some of that with you when
you're as you're moving and but that's typically
00:10:02
not possible because um mortgages are securitized
and sold to mortgage backed Securities investors
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and so you typically end up negotiating with
the mortgage serer and there's been you know
00:10:12
some some evidence following the financial crisis
and and some um kind of case studies these days
00:10:16
of how difficult is it they typically don't
have to write incentives to renegotiate with
00:10:21
you there's not that much in it for them right
and so I think if the government were to step in
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it could certainly um incentivize maybe provide
um some benefits uh in in terms of and allowing
00:10:30
services to renegotiate on the component of
relocation or the lack thereof because of of of
00:10:36
the mortgage lock in where do you think are are
the biggest impacts that we're seeing so in our
00:10:41
research we certainly found that moving far away
and across state actually if anything um is is
00:10:48
a little bit more affected by mortgage lockin so
you and and that obviously means part of it could
00:10:53
be that maybe the benefits of moving far away are
a little bit more uncertain you have to you know
00:10:59
maybe take your entire family with you and
there's uncertainty around that and so giving
00:11:03
up something for sure which is your low rate for
something that's much more uncertain in the future
00:11:07
say like right like future um a better paid job
that's going to pay you a lot more money actually
00:11:13
in into the into the full future but maybe that's
difficult to trade off with sort of a certain low
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rate that you have right now so that that could
certainly have medium and longer run effects um
00:11:24
on productivity on yeah firms being able to
hire the right workers yeah um and obviously
00:11:30
the the kind of opportunities um that that people
take but would you think that like something like
00:11:35
around hiring the right workers and that component
of lock in that we expect this I guess to a degree
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to be somewhat cyclical that we're going to work
our way through this as we move forward then that
00:11:47
potentially the impact in the labor markets with
companies it is it is it the potential of being
00:11:53
somewhat cyclical and maybe even a little bit
more short-term the impact that you would see
00:11:58
with companies and work workers I mean if you
look at the aggregate data you we don't see a
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lot of evidence um that that people have trouble
hiring um the the labor market has been quite
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strong so we haven't seen it in the immediate
data so the kind of question for the economy
00:12:12
whether this will have me maybe more medium-term
um detrimental effects will depend on whether a
00:12:19
given worker who's locked in is very difficult to
substitute and that may differ very much across
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different Industries so maybe you have very very
particular skills but you're not willing to move
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then a firm that really requires your skills
will have trouble and may do worse as a result
00:12:33
of that on the other hand if most people who are
locked in can be replaced by people who renting
00:12:37
who people who are still mobile who don't have
a mortgage then maybe the aggregate effects are
00:12:41
a little bit more muted so that's that the jury I
think is very much still out on the kind of Labor
00:12:46
reallocation does the question around lack of
inventory does that factor into this to a degree
00:12:51
as well I certainly think so so I think that as
I was saying earlier the fact that an individual
00:12:55
does not put their house up for sale basically
causes these Ripple effects for other people
00:13:00
who depend on the market being liquid um and that
uh certainly can affect people's ability to move
00:13:06
to a certain place to find the right house right
there may be um certain types of housing as single
00:13:11
family housing may be particularly difficult to
obtain and that's what you certainly need if you
00:13:16
want to relocate for a job far away we think
of that as like an important externality which
00:13:20
is why policy should look into it in the first
place is that these are not individual decisions
00:13:25
that the individual can resolve they may actually
affect lots of other sellers and buyers this may
00:13:29
be a hard question to ask because I think a lot
of people would say you know we've been in this
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kind of mortgage lock in now for a couple years
at this point is this something that we should
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expect that is going to have Ripple effects longer
term in the housing market right now most of these
00:13:44
households have locked their rates in for 30 years
so they can technically they could stay in place
00:13:50
and keep their 3% mortgage for up to 30 years
and so the potential of having long run effects
00:13:55
is is certainly there um and what we've seen over
the last year I think to the end of the last year
00:14:00
there was a lot of enthusiasm I think slightly
unwarranted uh and a push for for lower rates
00:14:05
given that inflation had subsided but I think if
anything some of the markers that we're seeing
00:14:09
today May point to some upside risks for inflation
and so I think it's very difficult to predict how
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long interest rates are going to stay high and
while that's happening people are basically in
00:14:20
this gridlock that they're not they're kind of
waiting and maybe is kind of not wanting to to let
00:14:24
go these these currently currently low rates and
that obviously causes a lot of pen up demand house
00:14:30
prices are high for instance for in particular
for first-time buyers and families who want to
00:14:34
own a house that that obviously kind of pushes
back all of their life decisions in a way if that
00:14:38
really is what what's keeping you what's a big um
barrier for you to enter the housing market and
00:14:43
so the longer that subsides every kind of month
and year will count because these are things that
00:14:47
are going to these this is going to be like pend
up demand and kind of um distortionary effects uh
00:14:53
that could be quite large for many people and I
guess to a degree it also buts butts up with the
00:14:57
fact that we're in a cycle right now where younger
Generations weren't looking to buy that they were
00:15:03
waiting longer to buy that first home so that's
the dynamic that probably has factored in a little
00:15:08
bit to this as well exactly so I think that's
certainly what people have said that during the
00:15:12
pandemic there was a lot of people for instance
like moved in with their parents to actually save
00:15:15
for a down payment so what people have observed
is that there's actually a huge cohort of people
00:15:21
who are looking to buy and looking uh to to buy
a house for the first time they're forming a
00:15:25
new household because they've paid they saved
for a down payment and they kind of entered a
00:15:29
market that had high prices uh High mortgage
rates and low inventory right and so I think
00:15:36
there's a general sentiment that people are upset
about this constellation it's basically facing a
00:15:40
triple set of challenges which is why I think um
policy wanted to Signal the the kind of State of
00:15:44
the Union Address I think signaled that they heard
that there were people who who were facing these
00:15:48
issues but obviously yeah the question is how do
we design these policies to actually be effective
00:15:52
great to have you in here thanks very much thank
you very much thank you uh Lulu who is assistant
00:15:57
professor of Finance here at the warden school
thank you for listening to the ripple effect we
00:16:02
hope you found this episode informative and
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