The Thirty-Year Mortgage Needs Innovation & It’s Coming
July 5, 2023
By Willie J. Costa & Vinh Q. Vuong
An interesting Bloomberg article sheds light on a question that many people – including economists and researchers – have been asking for a while now: why isn’t the housing market crashing? After all, interest rates are up (and Chair Powell has already stated that he has no intention of halting the attack on inflation anytime soon), which should push down demand. Globally, this is the case, but even among wealthy countries the home price in the United States has barely shifted 0.5% from a year ago; New Zealand, by contrast, saw a 16% decline in housing prices and is already in a recession, and in the UK there is already serious concern of economic turmoil ahead – including 800,000 British mortgages that will reset from their fixed rates later in 2023, and another 1.6 million that will do so in 2024.
In many ways, our housing market is a victim of its own success: decades of mortgage guarantees by Fannie Mae and Freddie Mac have made the thirty-year mortgage a staple of the American mindset. Such was not always the case, of course: prior to government intervention, mortgages in the United States were a complicated beast: a combination of local, state, federal, and even international parties competing for profits; credit rate susceptibility via building & loan associations’ “share accumulation” contracts; mutual savings banks and life insurance companies offering mortgages, since commercial banks were forbidden from doing so by the National Bank Act of 1864; and the establishment of the United States Mortgage Company in 1871, led by a board of directors that included the likes of J.P. Morgan, firmly entrenched the mortgage-backed security (an innovation imported from Europe) within the American financial landscape. Without mortgage-backed securities and government intervention, mortgages would be very different today, and it’s unlikely that any bank in its right mind would lend money at (relatively) low rates for a duration that would literally span a generation.
The recent strength of the U.S. housing market (new-home sales surged 12% month-over-month in May, up 20% from a year ago, to a seasonally-adjusted annual rate of 763,000) is creating a double-edged sword that most people likely have a sense of, but the consequences of which will be felt throughout the country for several years, if not decades. The 30-year fixed mortgage is fairly unique American luxury that will allow more homeowners to stay in their homes and build wealth steadily over time (via increase in home equity and the expectation of rising home values), but as is usually the case with modern financial wisdom, this is a short-term view that ignores some of the longer-term consequences. First and foremost, it binds homeowners to their mortgages and makes the entire housing market less liquid: this will make it more difficult for people to relocate (forcing them to potentially face professional consequences or stalls in career developments as an increasing number of companies, apparently in a fit of unbridled collective insanity, flirt with return-to-office mandates regardless of the impacts on their workers or the bottom line) or are more unwilling or unable to move to be closer to families (especially concerning given that 73% of employees also function in a caregiver role for ailing family members in addition to their “regular” work, which directly ties to their earning potential). In short, people will stay in place because they don’t have any other choice, which will keep inventory low and force prospective homebuyers to seek shelter (rather literally) in new-construction homes, the supply of which can be firmly controlled by homebuilders in order to keep prices high.
The macroeconomic consequences are obvious: housing illiquidity will cause a large portion of the labor market to simply be locked out of any potential career advancements or improvements to quality of life, leaving several million more Americans to base their career and life decisions on the nihilistic (and incorrect) conclusion that one of the most important aspects of the American Dream will remain forever beyond their reach. Developed economies rely on innovation to thrive, and that requires mobility and liquidity, but the mortgage industry will – through no fault of its own – contribute to decades of economic deadlock as huge swaths of the workforce are either priced out of mobility or are forced to wait for an entire generation to die off simply for the opportunity to one day own a home.
High rates don’t just hurt homeowners looking to relocate or prospective homeowners looking to buy: they cause trickle-down effects that will hamstring the entire economy. The thirty-year mortgage will – and should – remain a permanent fixture of the American homeownership experience, but the current environment demonstrates that its structure is inherently flawed when stress-tested against unprecedented, real-world disasters such as pandemics, runaway inflation, and weak monetary policy. The mortgage industry in the United States has remained relatively unchanged since the first American mortgage was issued in Saint Louis in 1766; in the ensuing centuries, its weaknesses and frailties have been laid bare time and time again. It’s about time that Americans have a more robust, resilient option – one that actually works for them, rather than burdening them with debt and, in some cases, ironically depriving them of opportunity. We at Garrison Fathom and FinancX are working hard on disrupting this industry with a new innovative model that will forever change our financial system. Stay tuned.
By Willie J. Costa & Vinh Q. Vuong
An interesting Bloomberg article sheds light on a question that many people – including economists and researchers – have been asking for a while now: why isn’t the housing market crashing? After all, interest rates are up (and Chair Powell has already stated that he has no intention of halting the attack on inflation anytime soon), which should push down demand. Globally, this is the case, but even among wealthy countries the home price in the United States has barely shifted 0.5% from a year ago; New Zealand, by contrast, saw a 16% decline in housing prices and is already in a recession, and in the UK there is already serious concern of economic turmoil ahead – including 800,000 British mortgages that will reset from their fixed rates later in 2023, and another 1.6 million that will do so in 2024.
In many ways, our housing market is a victim of its own success: decades of mortgage guarantees by Fannie Mae and Freddie Mac have made the thirty-year mortgage a staple of the American mindset. Such was not always the case, of course: prior to government intervention, mortgages in the United States were a complicated beast: a combination of local, state, federal, and even international parties competing for profits; credit rate susceptibility via building & loan associations’ “share accumulation” contracts; mutual savings banks and life insurance companies offering mortgages, since commercial banks were forbidden from doing so by the National Bank Act of 1864; and the establishment of the United States Mortgage Company in 1871, led by a board of directors that included the likes of J.P. Morgan, firmly entrenched the mortgage-backed security (an innovation imported from Europe) within the American financial landscape. Without mortgage-backed securities and government intervention, mortgages would be very different today, and it’s unlikely that any bank in its right mind would lend money at (relatively) low rates for a duration that would literally span a generation.
The recent strength of the U.S. housing market (new-home sales surged 12% month-over-month in May, up 20% from a year ago, to a seasonally-adjusted annual rate of 763,000) is creating a double-edged sword that most people likely have a sense of, but the consequences of which will be felt throughout the country for several years, if not decades. The 30-year fixed mortgage is fairly unique American luxury that will allow more homeowners to stay in their homes and build wealth steadily over time (via increase in home equity and the expectation of rising home values), but as is usually the case with modern financial wisdom, this is a short-term view that ignores some of the longer-term consequences. First and foremost, it binds homeowners to their mortgages and makes the entire housing market less liquid: this will make it more difficult for people to relocate (forcing them to potentially face professional consequences or stalls in career developments as an increasing number of companies, apparently in a fit of unbridled collective insanity, flirt with return-to-office mandates regardless of the impacts on their workers or the bottom line) or are more unwilling or unable to move to be closer to families (especially concerning given that 73% of employees also function in a caregiver role for ailing family members in addition to their “regular” work, which directly ties to their earning potential). In short, people will stay in place because they don’t have any other choice, which will keep inventory low and force prospective homebuyers to seek shelter (rather literally) in new-construction homes, the supply of which can be firmly controlled by homebuilders in order to keep prices high.
The macroeconomic consequences are obvious: housing illiquidity will cause a large portion of the labor market to simply be locked out of any potential career advancements or improvements to quality of life, leaving several million more Americans to base their career and life decisions on the nihilistic (and incorrect) conclusion that one of the most important aspects of the American Dream will remain forever beyond their reach. Developed economies rely on innovation to thrive, and that requires mobility and liquidity, but the mortgage industry will – through no fault of its own – contribute to decades of economic deadlock as huge swaths of the workforce are either priced out of mobility or are forced to wait for an entire generation to die off simply for the opportunity to one day own a home.
High rates don’t just hurt homeowners looking to relocate or prospective homeowners looking to buy: they cause trickle-down effects that will hamstring the entire economy. The thirty-year mortgage will – and should – remain a permanent fixture of the American homeownership experience, but the current environment demonstrates that its structure is inherently flawed when stress-tested against unprecedented, real-world disasters such as pandemics, runaway inflation, and weak monetary policy. The mortgage industry in the United States has remained relatively unchanged since the first American mortgage was issued in Saint Louis in 1766; in the ensuing centuries, its weaknesses and frailties have been laid bare time and time again. It’s about time that Americans have a more robust, resilient option – one that actually works for them, rather than burdening them with debt and, in some cases, ironically depriving them of opportunity. We at Garrison Fathom and FinancX are working hard on disrupting this industry with a new innovative model that will forever change our financial system. Stay tuned.
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