Slowly unwinding a phenomenon that wrecked the housing market.
By Wolf Richter for WOLF STREET.
The share of below-3% mortgages outstanding, by number of mortgages, declined to 20.0% of all mortgages outstanding in Q3, the smallest share since Q1 2021, and down from a share of 24.6% at the peak in Q1 2022 (red in the chart), according to data by the Federal Housing Finance Agency (FHFA).
The share of below-3% mortgages had exploded from early 2020 through Q1 2022 when the Fed’s interest rate repression – via trillions of dollars of asset purchases, including mortgage-backed securities (MBS) and 0% policy rates – created a tsunami of homeowners refinancing their homes to get these new ultra-low interest rates.
The share of 3% to 3.99% mortgages declined to 31.5%, the smallest share since Q3 and Q2 2019, and beyond that, the smallest share since Q2 2016 (blue).
All types of mortgages are included here, such as 30-year fixed-rate mortgages, 15-year fixed-rate mortgages, and Adjustable-Rate Mortgages.
Combined, the share of below 4%-mortgages dropped to 51.5% of all mortgages outstanding, the lowest since Q4 2020, as homeowners, facing changes in life – new job in a different city, divorce, growing family, death, etc. – ever so reluctantly sell their home and thereby let go of these ultra-low interest-rate mortgages.
At the peak in Q1 2022, over 65% of all mortgages outstanding had interest rates below 4%.
The share of Adjustable-Rate Mortgages has been hovering at low levels since 2021, and dipped in Q3 to 4.0%, down from over 10% in 2013, the extent of the FHFA’s data.
Some ARMs had rates below 3% even before 2020, which is one of the factors in why the below 3% mortgages (red line in the top chart) was between 2.5% and 4% before 2020.
Homeowners with ARMs that were originated when rates were low experienced payment shock when their mortgage rates adjusted as rates began to rise in 2022. But that payment-shock phase has mostly passed by now.
The share of 4.0% to 4.99% mortgages declined to 17.1%, the lowest share in the FHFA’s data going back to 2013, and down from the peak in 2019 of 40%.
When mortgage rates plunged in 2020, massive numbers of homeowners refinanced their mortgages into lower-rate mortgages – but not everyone could get a below-4% mortgage.
Homeowners who had qualified for mortgage rates between 4.0% and 4.99% before 2020 refinanced into the lowest-rate categories. But homeowners who had 6% or 7% mortgages before 2020, due perhaps to a tarnished FICO score, also refinanced into mortgages with sharply lower rates, but the lowest rates they might have had available were in this 4% to 5% range.
In other words, many homeowners refinanced out of this category in 2020-2022 and into lower rates, while a smaller number of other homeowners refinanced from higher rates into this category over the same period.
The share of 5.0% to 5.99% mortgages has remained roughly stable in 2023-2025, near 10% of all mortgages outstanding (blue in the chart below).
There are currently lots of fixed-rate mortgages offered in this range. For example, the interest rate of the average conforming 15-year mortgage was 5.44% in the latest week, according to Freddie Mac, but 15-year mortgages are not very popular.
The share of 6%-plus mortgages rose to 21.2% of all mortgages in Q3, the highest since Q3 2015, up from a share of 7.3% at the low point in Q2 2022 (red in the chart).
“Locked in” by Free Money. Below 3%-mortgages are free money in real terms because inflation is currently running at about 3%, and if borrowing costs run at the rate of inflation or below, it’s the equivalent of borrowing money at no cost … free money.
These ultra-low mortgages were a result of the Fed’s reckless monetary policies that caused home prices to explode in many markets by 50% and much more in just two years through mid-2022.
Those too-high home prices and ultra-low-interest-rate mortgages have now locked up part of the housing market – with those homeowners not selling and therefore not buying because they don’t want to finance a more expensive home with much higher interest rates.
This “lock-in effect” has haunted real-estate brokers, mortgage brokers, and mortgage lenders– as transactions and mortgage originations have plunged, and therefore income from commissions and fees has plunged, triggering waves of mass-layoffs and voluntary departures since late 2021.
Nevertheless, life happens – new job, return-to-the-office mandate, divorce, family additions, death, natural disasters, whatever – and so some of those “locked-in” homes with ultra-low-interest-rate mortgages get sold anyway, and the mortgages get paid off, and their share shrinks slowly, unlocking the housing market bit by bit.
Just how crazy were those ultra-low mortgage rates? Between early 2021 through 2022, the average 30-year fixed mortgage rate was below CPI inflation – negative “real” mortgage rates – free money!
At the peak of the Fed’s craziness, “real” mortgage rates were 4 percentage points below CPI, with the average 30-year fixed mortgage rate below 3% and CPI inflation exceeding 7%.
Those were the craziest times ever in the mortgage market, and in the housing market, and those negative real mortgage rates wrecked the housing market through a historic home price explosion (now being unwound in many markets).
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Excellent article. I see this pandemic related distortion dominating the Real Estate Sales market for at least another decade, or until the bottom falls out of the prices because of a recession or depression. So any new buyer is almost guaranteed to lose money. Most holders of these free money mortgages will hold on until a major life event forces them to sell. They will rent their property in the event of a job change which forces a move. There are 45,000 real estate agents here in the state of Maryland. They are leaving the business in droves. 3,000 left last year alone.
I have heard that a lot around here (“If it doesn’t sell for my price, I’ll just rent it out.”). Then they list it for rent and it sits.
The demand to rent single-family homes isn’t as high as these people think it is, at least not at the rents they’re asking.
I’ve heard good stories & I’ve heard nightmare stories.
I believe most landlords are like a lamb accidently stumbling into the Lions den.
The entire industry is built for amateur hour with no warning signs.
Being greedy in a housing
bear market is astonishing.
Sure, but my larger point is that a lot of people, who say are willing to pay $5,000/mortgage, taxes, etc. are not going to be willing to pay that amount, or even close to it, for rent. So the math in these people’s minds doesn’t math, as they say.
We have a lot of those in Denver atm.
I’ve also heard horror stories about properties getting trashed and the fixes costing more than what they made it rent. A coworkers tenant burst a pipe and didn’t tell him, instead just moved out so he didn’t find out until he was inspecting the property after she left.
Even without horror stories, simple wear and tear and age beats up a property and it’s associated systems (HVAC, plumbing, appliances, etc) over time that is almost never accounted for by rookie landlords. That furnace is going ot have to be replaced and nobody is accounting for that. They rent it out for 3 years, and now go to sell it and now they need some appliance replaced, the floors are trashed, the water heater is leaking oh and the roof needs to be done.
In the Great Recession, realtors left the market in droves then too.
Very good summary. Thank you.
Thanks wolf
IMHO – The inflation-adjusted mortgage interest rates are going down to 2%-5% in 2027. Absolute interest rates won’t go down, or maybe even up much, but with the Fed now printing money to pay the interest on the debt, inflation is sure to increase. People who continue to see U.S. Treasuries as a safe harbor are going to get fleeced. You know who they are, big pension funds, insurance companies, big ‘safe’ investment funds such and so forth, run by risk-adverse bean counters with no imagination and no spine, and they all deserve to go to jail for lying to their policy-holders, beneficiaries and investors, just to hold on to their jobs for a few more years, while they march their policy-holders, beneficiaries and investors off the cliff.
Buying other currencies is no safe harbor because all currencies are going down in comparison to precious metals, and the big financial guys are nearly all prohibited from PMs.
And single family residences won’t go down much in terms of absolute dollars nationwide, only in select markets. But that shipped has sailed in making big inflation-adjusted returns from SFRs, for the next 10-15 years.
There will be winners and there will be losers. The safe harbor bean counters will be the biggest losers, with negative returns adjusted for inflation.
This will be the big come-uppance of the skeptics against the believers in the institutions.
Looking forward to the next 5-8 years. I will be laughing all the way to the bank.
I have more degrees than a person should be allowed to get, and that’s how I became a disbeliever in the system. I realized that most fundamental theories in our social systems, including economics, are self-referential (no fundamental truth). Look at what is going on in MN for example. My first 2 degrees were from MN, and I despise those people. They thought they could re-define reality, just like the architects of our financial system.
I know ARMs have dropped as a percentage of outstanding mortgages, but even at a reduced percentage, every outstanding ARM is seeing their rates drastically increase.
Furthermore, I think lenders learned their lesson with ARMs. It is definitely anecdotal, but I know of two people who had did ARMs during the pandemic whose rate adjustments are going higher than standard 30 year mortgage rates. The language in the ARM was such that they are seeing 7 or 8% rates now.
Now they have to decide if it is worth paying the friction (i.e. closing costs) to refinance.
The payment shock for ARMs is by now behind. Most ARMs adjust to SOFR, which rose to 4.3% in Dec 2022, topped out at 5.3% in July 2023, stayed there until Sep 2024, and has been dropping since then. SOFR is currently 3.87%.
When SOFR started dropping, ARMs adjusted DOWN, and payments got smaller. That’s the phase they’re in now: adjustments to lower payments.
Right, but ARMs have an initial lock period where the rates stay low. Generally 5 years, but I have seen 3 or 7 as well. An ARM with a seven year lock signed in 2019 is going to be unlocking next year. An ARM with a 5 year lock signed in late 2020 just unlocked recently.
So my point was, ARMs signed with locks during the COVID craziness are becoming more expensive right about now (plus or minus 12 months). I am guessing that a lot of those ARMs were cheap (low rate) initial mortgages, but after they unlock they are getting higher rates. I am guessing they are moving from the “sub 4%” or “sub 5%” bucket to the “higher than 6%” bucket.
Also, what I meant by mortgage lenders got smart about ARMs is that although they are tied to the SOFR, it is typically SOFR plus a number that makes them a higher rate than a standard 30 mortgage rate now that they are unlocked.
For example, while I do not remember the exact numbers my acquaintance said, the gist of his complaint was that he had signed an ARM with a 5 year rate lock in 2020 around 4% (i am guessing 3.875% or so). When the lock expired in August or September of this year, his adjustable rate is going to climb to just over 7% if SOFR does not change.
It is a higher rate than the standard 30 year, but not so significantly higher that would make it obvious choice to pay the friction costs to refinance.
“It is a higher rate than the standard 30 year, but not so significantly higher that would make it obvious choice to pay the friction costs to refinance.”
I think probably the point I was failing to make is that for some multi-million dollar ARMs the amount of borrowing is so extreme that even a small increase in the rate comes to thousands of dollars a month more in interest. I am just thinking out loud if these borrows were really stretching to get those loans in the first place in a gamble that rates would be more favorable about 7 or 10 years. And if they are not, what will be the result of the interest rate increases. For example, I personally know of a 4 million loan at 3.25% on a 10 year ARM. It will float free in another 4 years. In the mean time the taxes have increased on this home by 30% in in 6 years to 64k annual which is eye popping. The monthly mortgage may well increase from 18k a month currently to 24k a month in the first two years the ARM is allowed to float (2% max increase). The individual that owns this home is starting to struggle even now. There are others in a similar situation that gambled with large loans. Why the banks or non-banks made these loans is a whole other question. But from a macro economic perspective these loans may be insignificant. However, from a regional bank loan perspective as was the case with this loan the losses may be significant.
I personally know of several jumbo ARMs on homes in my area that are set on a 10 year ARM with 4 to go. These are 2 to 5 million dollar mortgages. So although many 2, 3 and 5 year ARMs have adjusted there are still some rather large 10 year ARMs out there. The percentage might be insignificant as I have no data on it.
There is an aspect to this that I have long talked about but that generates very little enthusiasm amongst others because it is counterintuitive. That is, it doesn’t necessarily hurt to refinance your primary residence even at these higher interest rates.
As inflation drives the price of everything higher and people find themselves needing to improve their monthly cashflow, then those who have significant equity built up in their house can benefit from a refi and reduce the “nut” (i.e. the fixed monthly mortgage payment) by shifting the balance of their debt into a new 30-year term.
I think this trend is only going to accelerate and those low-rate mortgages will steadily get eaten up people looking to improve their balance sheets by extending their term structure.
Your comment is equivalent to “Cutting your throat to blow your nose”. I “ll get rid of my 2.5% rate at 30/yrs to refinance @5.5 or 6.0%. That’s is Nuts. Never mind the increase in taxes and insurance we’ve seen across America. If you are not forced to sell or drowning in debt. Your best decision is to stay the course, and pass that rate down to the kids or grandkid’s. Even renting to extended family better option than refinancing.
I read Bessent wants ZIRP-NIRP back.
He sees the Fed rate at 1% in one year from now.
I also hear all you have to do while being interviewed for the Fed chairs job is to grovel at bessents & trumps feet.
I can grovel for power.
I also heard the Oracle of Omaha didn’t like the idea of bills going 1% & threatened to buy Japanese bonds. Buffet has $384 billion in T-bills. Not even Wolf has that much 🙂
Without any context beyond ‘I read’ or ‘I heard’ isn’t the most accurate response to any comment of this nature, so what?
Especially when AI says U.S. Treasury Secretary Scott Bessent has not explicitly called for a return to a Zero Interest Rate Policy (ZIRP) or Negative Interest Rate Policy (NIRP). Instead, his public comments and policy actions indicate a focus on lowering current interest rates through economic growth and fiscal policy changes, rather than Federal Reserve action, which he sees as constrained by a high neutral rate.
Who is going to buy a 1 percent t-bills when inflation is over 5 percent?. For that matter, over 2 percent. Buy some gold, land, a business, etc. This countries finances are a blatant mess.
I agree.
Add in college tuition, remodels, emergencies, etc…Current Helocs start at 8% plus so if you need a lot of funds then a cash out refi is the only real option.
I have 50% equity in my house and a sub-3% rate. I just checked and my payment would go up by 20% if I refinanced into a current 30 year.
It’s going to take a long time for the distortions in the house and condo market to return to normal. Meanwhile, most young Americans will not be able to afford a house. My house, according to Zillow, is worth 11 times more than I paid for it. That’s how bad inflation has been. Money printing, especially cheap money with low rates, corrupts the money, corrupts prices, corrupts the economy. There are no zero rates in capitalism. In 2020 our central bank drove down rates to stimulate buying of homes, cars, appliances, etc. But in 2 years price inflation in houses was 60% to 100%. It was a terrible decision. And we have $38.5 trillion in federal debt going to $50 trillion in 10 years. Interest on that debt is about $1.3 trillion per year. Total Debt divided by GDP is horrendously high.
Got news for ya, Jeff. $50 trillion in debt will be here well before 100 years. A lot closer to 5 years.
Yep, since we are increasing in net, debt by about $3 tril/ year, total debt will be about $50 tril in 4 years.
The debt has increased at a rate of about $2.2 trillion a year in 2024 and 2025, and by $2.6 trillion in 2023.
I knew this would happen.
This is America. The land of irresponsible YOLO spending and showing off on social media. Did anyone think that people were going to get a 3.0% mortgage and never refinance or move again in their lives?
If activist types were Economics majors, they would be marching on Constitution Avenue.
Or they might ‘assume a march’….
In this article, there is the notion that the Fed has an undemocratic and independent power, e.g. “…the Fed’s reckless monetary policies” and “At the peak of the Fed’s craziness…” But the Fed’s money comes from debt, and that debt has to be approved by Congress, correct, i.e. the “debt ceiling”? In other words, for the Fed act in a crisis, e.g. a pandemic, Congress presumably has to approve the additional debt issued (and there need to be buyers of that debt, as well; if the Fed was being so stupid, why would the market buy the debt?). Was it truly the Fed being reckless, or should the analysis be that the system is reckless, with the Fed playing its role?
Maybe the government went too far with “free money” but it was solving a nonlinear, i.e. difficult to model, social (and political) problem that was alleviated by making money available. Hypothetically, suppose the government had done nothing in response to the pandemic, and just told people to rely on their emergency funds? How would that have worked out? Not well.
“But the Fed’s money comes from debt, and that debt has to be approved by Congress,”
No… some conceptual confusion here.
The Fed (Federal Reserve) created massive amounts of money out of nothing during QE and bought trillion of dollars of securities (debt) with it.
The Treasury Dept. issues (sells) the securities (debt) to fund the expenditures that Congress passed into law and told the Treasury Dept to fund.
“Hypothetically, suppose the government had done nothing in response to the pandemic, and just told people to rely on their emergency funds? How would that have worked out? Not well.”
I think you are wrong.
Wealth concentration and unaffordability are at highs. Inflation skyrocketed to 9% at peak, 20% over 4-5 years. Trust in government has been lost. People feel the system is rigged more than ever. That’s your “not well” ending.
The alternative was a well deserved drop in asset prices from unsustainable levels, which might have temporarily increased unemployment. Look to past recessions to see how free market forces quickly resolve that problem.
Why do some people quickly lose confidence in themselves and others, then look to governments for bailouts and freebies? It creates unnecessary dependency.
Any way to know how much of the ratio change is due to people paying off the 3% versus the rise in >6% originations?
Percentage of 3% could decline even if none are paid off, as an extreme scenario.
It looks like the majority of mortgages in America are fixed, mainly 20 to 30 years, while in Canada, the mortgage rates are variable (or ARM as they say in America).
Would that mean that an American in 2021 who took on a 30-year mortgage at 2% pays that rate for the rest of the mortage?
Because in Canada, the 0.99% 5-year fixed mortgages have to be renewed at current rates from 2026 and beyond. Which explains why it feels like Canada is undergoing a consumer slowdown right now, in addition to a population decline of approximately 80,000 people.
Yes, “fixed rate” means fixed for the entire life of the loan.
It is funny how predictable this looks. Almost straight lines. Like the amount of MBS running of the Feds balance sheet. It is basically same for every month in the long run.
Makes me think of psychohistory in the Foundation by Isaac Asimov.
I mean, I’m not giving up my 2.875% anytime soon
I wouldn’t either. In fact, I resisted the urge to take a mortgage out on a property in 2021 just for the low rate. Oops. I won’t make that mistake again. The next time we have a pandemic and the Fed crushes rates to 0%, I’m borrowing!