There are downsides.

I have a really great rate on my mortgage, but our house is super expensive and small for our family… but now we can’t afford to move.

If we moved to a new house, we would have to pay off this great mortgage and get a new one, at a much higher interest rate. Even if we found a house that cost the exact same as ours, the monthly payment would be 50% higher, because current interest rates are more than twice what we have. We are locked into our house.

If you were looking to buy a house right now, you'd be looking at a bunch of options that are worse than what you currently have. You experience this as lock-in but in reality the "problem" is just that you have something significantly better than anything you (or others) can find on the market right now. And of course that's actually a fantastic boon.

But part of that is because people who would otherwise want to sell their house are choosing NOT to, because they don't want to lose their great mortgage. If we didn't have these long, fixed rate, mortgages, there would be a lot more housing liquidity and prices wouldn't be so inflated.

Now, there is a cycle of "rates go down, there is a flurry of re-finances and everyone locks in the lower rates and new buyers enter the market, and housing prices go up and up", and then rates go up, but housing prices don't go down because people can't afford to buy the houses at the same prices anymore, and so no one wants to sell (because the current owners are paying below market rates for their mortgage, so they face no selling pressure like they would if there WEREN'T long term fixed rate mortages), so there is no decrease in prices.

You're missing the bright side - this upwards price ratchet is amazing for institutional investors and banks and realtors, though.

What’s the alternative that’s better? Having a 5/1 or 1/1 ARM just means that your current house’s mortgage would also be more expensive because your 3% mortgage would have adjusted upward by now.

If you’re willing to have your current mortgage be more expensive to avoid the “downside of being locked into a low payment, you could just pretend your mortgage had adjusted and go buy a house that suits your needs better.

Home prices are probably higher now than they would be due to the limited supply due to people being locked into house.

Aren't most people who are "locked into house" a seller that's removed from the market, but also a buyer that's removed from the market?

I can see how someone who decides to keep their current house to use as a rental and buy a new owner-occupied property would tend to increase house purchase prices slightly (but also increase rental availability and lower rent prices slightly), but also think that’s a tiny minority of current homeowners.

I don't know how this works in the US, which is why I'm asking, but you paid of part of your mortgage already, so if you could sell you home for what you paid, or more, the difference would be cash-in-hand. If you spend all that buying the new home (assuming same price or lower), your new mortgage would be lower, and potentially cheaper, even with the higher interest rate.

You could also convert a 3% mortgage to a 5% for example. Because the owners of the 3% mortage aren't that interested in it any more, you could get that at perhaps as low as 80% (a former coworker got as low as 65%) of the original value. So if you buy a home for e.g. $200.000, you paid of $50.000 and "buy back" the rest at 80% you're now left with $120.000 of debt. You then get a new mortgage for that amount, and even at higher rate, that might result in a monthly saving. When the remaining amount is low enough, you could refinance and get e.g. a 10 year fixed rate mortage for a really low rate.

I don't know if you can do that in the US, but that's pretty much standard in Denmark. Most people will do that maybe 3 - 5 times during the lifetime of a mortgage. For the most part is make absolutely no sense, the bank just do some paper work, have you sign and then you owe less, but at a higher interest.

This is some drawback. "I have access to the same bad alternatives as everyone else."

This is why the US housing market is deadlocked (live locked?).

Sellers arent willing to lower prices AND lose a low rate and buyers aren't willing to pay those prices and expect a buyer's market.

Nothing is moving and realtors are hurting.

Something has to pop the bubble, will it be massive job loss that forces relocation or sale for cash and move to apartment?

Who knows?

>Nothing is moving and realtors are hurting.

"Won't somebody think of the realtors?" isn't one I've heard before.

You used to be able to assume someone's mortgage when you bought their house to keep the good rate going, but that's much less common now

You still can with certain types of mortgages.

> Do 30-year mortgages make the other houses more expensive somehow?

OP didn't mean to say this, but yes, unfortunately they do. Anything that "increases affordability" will result in an eventual increase in the principal value for things that are supply constrained.

I appreciate the good deal we have, but my point is that long term fixed mortgages really complicates the housing market and can make it so you are stuck where you are, especially if you buy a house when rates are low.

Think about what happens. My wife and I wanted to buy a house. Our budget is mostly around what we can afford as our monthly payment, just like everyone else. That means if interest rates are low, we can afford a much more expensive house (obviously). Ok, so we buy one with a payment we are comfortable with.

Now, rates go up. Say we need to move for a job, so we need a new house, and we still have the same budget. Well, that means the total cost of the house we can afford is much lower, because the higher interest rates means the total loan value must be much smaller to keep our monthly rate the same. If we were first time buyers, this is fine, because everyone is in the same boat; everyone has a smaller budget because monthly payments on the mortgage are higher, so housing prices should be lower. If that is the case, though, it means the house we are trying to sell won't sell for as much (because mortgages for house will cost people more), which means we would end up taking a loss on our mortgage (because even though our monthly payment is the same as the new loan, the total value of the old loan is a lot higher).

Of course, prices for houses don't move nearly as much when interest rates change as they should (relative to mortgage purchasing power). This is for many reasons, but part of it is because when rates are high, people (like me) don't want to sell their house and have to lose their really good mortgage, so fewer houses are on the market, which inflates prices. When rates go down, more people want to buy and sell houses, because they can both get more for their house they are selling and they can afford bigger mortgages on their new houses, which inflate prices.

Basically, this lack of mortgage liquidity works to keep housing prices high. When rates are high, no one wants to sell OR buy, and when rates are low, everyone wants to sell AND buy. Both result in prices being high.

30 year fixed mortgages are just a really weird financial product that has all sorts of market disrupting effects. You can pre-pay them whenever you want, so when rates are low, high rate loans are paid off and low rate loans replace them, but that means no one wants to sell their house and lose their great loan when rates are high. This means housing prices soar when rates are low, but don't come back down when rates are high. It creates a ratcheting effect on house prices, which is why so few people are able to buy houses.

This continues until the entire market collapses, like it did in 2007, and then the process repeats.

But, moving to a new house doesn't necessarily mean you have to sell the old house. In fact, since you got such a good deal on the first house, you can probably rent it our for a profit, and said profit can help you pay whatever you need to pay to be able to move to a new house that's more expensive, yet similar in quality.

Yes, I moved already using this method. People complaining of low rates just don't have any financial skills.

it seems like you are just assuming you have to sell the house for some reason.

you would simply just keep it and rent it out and problem is solved. you get passive income + still own the house and have low rates.

Would renting it out be an option?

It would be difficult. Mortgage interest is deductible from your taxes (up to a point), but only if it is your primary home. If we moved, we would have to pay a lot more in taxes.

The mortgage tax deduction is another thing that drives up home prices.

Rentals don't have deductible interest but have depreciation, which can be even better.

just makes the prices higher... you qualify for a house based on ratio of income to payment. so the demand is heavily influenced by the type of financing available..

Other than natural demand, Australia has a high real estate market due to the tax and a superannuation/pension distortions. Should try to fix those first. (probably impossible)

And as I pointed out in a sibling comment, it can lock you into your house if interest rates go up. We can’t afford to sell our house because the extra interest costs would increase our monthly payment by 50% even if the house cost the exact same as our current one.

I still don't understand how this means you "can't afford to sell your house." It just means you can't afford to buy another house at the same price as the one you have now. That's a different problem, and one that doesn't actually have anything to do with the interest rate on your existing mortgage. You can't afford to buy a house today at the same price that you could on the date you closed on your current house, but that's true regardless of the interest rate on the current house.

Let's put a number on it. Since the article uses $400k as a reference point, let's use that. You could afford to buy a $400k house back when you bought your current house. You cannot afford to buy a $400k house today. That would be true whether or not you had purchased your current house, and regardless of the interest rate on its mortgage if you had.

You only "can't afford to sell your house" if you're underwater on the mortgage and can't come up with the money to sell it.

Yes, what you say is technically correct.

We feel trapped because we would have to massively downgrade to move. Obviously, we COULD do that, but we don't want to.

You are right, we also couldn't afford to buy our current house if we currently didn't own a home, either. I am arguing that the fixed thirty year mortgages artificially drives up prices, which means that you are stuck and can't move whenever interest rates are high.

If we didn't have the fixed thirty year mortgages, housing prices would have never gotten so high, and buying and selling houses would be a lot easier, and people could move to where they want to be much easier.

Fixed-rate 30-year mortgages have been around for generations now. They're long since priced into the market.

Whether any specific person actually thinks through whether spending as much money as the bank will lend is prudent, instead of buying a house they can actually afford, saving the money, and upgrading later, is a different question. But it's not fair to blame the mortgage itself.

it's too expensive to move with closing costs and realtor fees :( It's almost always better to buy the most expensive house you can if you you still have a way to increase your earning potential in your career. if you could move without a 6% fee and $xx,xxx financial fees it would definitely be better for everyone overall except the industries who have inserted themselves into these transactions

In the vast majority of U.S. markets, it's almost always better to buy--or even rent--the cheapest house that meets your space and safety needs and invest the rest in index funds.

Anyone who ends up with their primary residence as their "biggest investment" has been a piss poor investor.

You are locked in because currently you have a great deal that you don't want to lose. If you were in Australia, you would already be paying that higher interest rate for your current house. I don't see how that's a downside.

That's very similar to not being able to change jobs because you cannot find another job that pay even 66.6% as well as your current one.

I have friends on 1% fixed rates over 30 here in Denmark. Bastards.

Doesn't Denmark allow to move your mortgage rate to another house? That is even better than the US.

It could be much longer if there was a sensible formula to predict remaining value. Construction quality plays to small a role in valuations.

Listen. I'm sure they seemed like a good idea at the time, but we tied them to retirement (so your entire material wealth is stuck in an illiquid asset that also falls apart slowly over time), and now we can't build any new housing because people think it will affect their golden years. Learn from our mistakes.