The US housing market has been through turbulent times in recent years. After dropping to record lows during the pandemic, the average interest rate on a 30-year mortgage has risen sharply in 2022 and 2023, currently hovering around 7.2%, a 20-year high. For those who took out mortgages at low interest rates before 2022, this sudden increase in interest rates has significantly increased moving costs, as taking out a mortgage at current interest rates could increase monthly mortgage payments by hundreds to thousands of dollars even if the amount borrowed remains unchanged. As shown by Ferreira et al. (2011), this lock-in effect can reduce geographic mobility and turnover in the housing market, attracting the attention of Federal Reserve leaders. In this article, we exploit a special question in the Federal Reserve Bank of New York's 2023 and 2024 SCE Housing Survey to estimate the extent to which mortgage interest rate lock-in is suppressing US households' moving plans.
US homeowners plan to stay put
When considering how mortgage rate fixation is affecting mobility, it is also worth noting that moving rates in the United States are currently quite low. While the decline in moving rates has intensified somewhat in recent years, Koşar et al. (2022) show that it is not just a pandemic-era phenomenon. For example, moving rates have been steadily declining for decades, already below 10% in 2019, but close to 20% in the mid-1980s. Frost (2023) shows that homeowner moving rates have been fixed between 5% and 10% annually since 2006, and residential switching is even rarer for homeowners. With such low moving base rates, it is unclear whether we should expect mortgage rate fixation to significantly reduce geographic mobility.
To assess the impact of fixing mortgage rates on homeowners' relocation plans, we first asked current homeowners about the likelihood they will relocate in the next three years. As shown in the histogram below, the relocation plans of U.S. households broadly reflect the reduced mobility we've seen in recent decades. Across the distribution of homeowners' self-reported current mortgage rates, nearly half of respondents rate the likelihood of relocating in the next three years as less than 10%, and nearly three-quarters of respondents rate the likelihood as less than 25%.
These patterns are fairly consistent across homeowners, both with and without a mortgage, with all groups reporting average probabilities of moving in the next three years between 16 and 19 percent. While these comparisons do not take into account differences in other characteristics between the groups, they suggest that very few U.S. homeowners plan to move in the next three years, and are comparable to the actual annual relocation rates reported above.
Distribution of self-assessed probability of moving over the next three years given current mortgage interest rates
Source: 2023 and 2024 SCE Housing Survey.
Note: Figures do not include renters. Estimating the lock-in effect
To understand the extent to which the lock-in effect inhibits households' plans to relocate, we presented homeowners with mortgages with a hypothetical scenario in which they were offered the option to keep their current mortgage interest rate if they were to relocate and buy another home. We then asked them how likely they were to relocate in this scenario over the next three years.
As shown in the chart below, the ability to maintain current interest rates had a significant impact on respondents' plans to move, with mortgage holders increasing the probability of moving by 7.4 percentage points, on average. This effect was particularly large for those with lower mortgage rates, with those with interest rates below 3 percent increasing their average probability of moving from 17.2 percent to 27.7 percent, and those with interest rates between 3 percent and 4 percent increasing it from 18.6 percent to 26 percent. Both of these differences were statistically significant, representing increases of 61 percent and 39.8 percentage points, respectively.
As expected, these revisions decrease monotonically with the respondents' current mortgage interest rates, with no statistically significant increases for those whose mortgage rates are already above 4 percent. That said, it is important to note that this result is primarily driven by about a quarter of homeowners. In fact, nearly half of the respondents do not revise their relocation likelihood at all, and about 73.4 percent only revise by 10 percentage points or less. We interpret this to mean that while mortgage interest rates are not a major driver of most respondents' relocation plans over the next three years, they are a significant constraint for a relatively small but significant proportion of homeowners.
Average probability of moving in the next three years given current mortgage interest rates
Source: 2023 and 2024 SCE Housing Survey.
Note: Black bars indicate 95 percent confidence intervals.
Perhaps a more intuitive way to interpret our results is through the lens of respondents' perceived mortgage interest rate gap. We define it as the difference between respondents' perception of the interest rate they would receive if they were to take out a new mortgage today and their current mortgage interest rate. The graph below shows that the distribution of perceived interest rate gaps is mostly positive, as respondents generally expect to need to take out a higher mortgage if they were to move than they currently do. About 9 percent report a negative perceived interest rate gap, indicating that they believe they will be able to get a better interest rate than they currently do. This may indicate that an individual's circumstances have changed since they took out their mortgage. For example, some of these individuals may have recently improved their credit scores.
Distribution of mortgage interest rate differentials as perceived by mortgage borrowers
Source: 2023 and 2024 SCE Housing Survey.
Notes: Respondents' perceived mortgage interest rate gap is defined as the difference between the respondent's perception of the interest rate they would receive if they were to take out a new mortgage and their current mortgage interest rate.
To summarize the results in terms of respondents' perceived interest rate gap, at baseline, respondents report an average likelihood of moving in the next three years of 17.5 percentage points, with an average perceived mortgage interest rate gap of 2.1 percentage points. In our hypothetical scenario, we set the perceived gap at 0 percentage points, and the average likelihood of moving rises to 24.9 percent. Considering these effects linearly, a 1 percentage point decrease in an individual's perceived mortgage interest rate gap translates to an average increase of about 3.5 percentage points in their self-assessment of the likelihood of moving in the next three years.
Would lower mortgage rates improve liquidity?
Private forecasters expect the federal funds rate to fall in the future, with mortgage rates broadly following suit. Our findings suggest that such rate declines will encourage increased relocation. That said, most homeowners surveyed do not appear to base their relocation plans on mortgage rates. For those who do, the impact of interest rate cuts on their liquidity will ultimately depend on their beliefs about the interest rates available on their new homes. Indeed, understanding how households shape their perceptions of the housing market is an interesting area of future research and is important for understanding the extent to which lock-in effects reduce liquidity.
Chart Data
Felix Aidala is a research analyst in the Research and Statistics Group at the Federal Reserve Bank of New York.
Andrew F. Haughout is director of household and public policy research in the Research and Statistics Group at the Federal Reserve Bank of New York.
Ben Hyman is a research economist in Urban and Regional Studies in the Research and Statistics Group at the Federal Reserve Bank of New York.
Jason Somerville is a research economist in the Consumer Behavior Research Department in the Research and Statistics Group at the Federal Reserve Bank of New York.
Wilbert van der Klaauw is an economic research advisor for household and public policy studies in the Research and Statistics Group at the Federal Reserve Bank of New York.
How to cite this post:
Felix Aidala, Andrew Houhoudt, Ben Hyman, Jason Somerville, and Wilbert van der Klaauw, “Mortgage Rate Lock-in and Homeowners Moving Plans,” Federal Reserve Bank of New York Liberty Street Economics, May 6, 2024, https://libertystreeteconomics.newyorkfed.org/2024/05/mortgage-rate-lock-in-and-homeowners-moving-plans/.
Disclaimer
The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the sole responsibility of the authors.