The recent spike in interest rates has had surprisingly little impact on US homeowners compared to their counterparts around the globe, a testament to the structure of the American housing market.
The key factor lies in the fact that most American homeowners opt for fixed-rate mortgages. This shields them from the immediate economic effects of fluctuating interest rates. Remarkably, about 96% of America’s residential mortgage debt constitutes long-term fixed debt spanning at least ten years, as reported by the Federal Reserve Bank of Dallas.
Homeowners in other countries such as the United Kingdom, Finland, Australia, Ireland, and Canada, on the other hand, tend to favor variable-rate mortgages. These types of loans are more susceptible to fluctuations in response to changing interest rates. In these countries, the percentage of the mortgage market made up by long-term fixed debt of at least ten years is less than 1.0%.
As per Bloomberg reports, British households are set to experience a significant jump in monthly mortgage payments this year as homeowners start renegotiating their mortgages to cope with rising interest rates.
The dominance of long-term, fixed-rate mortgages in the US is in part due to government-backed secondary market institutions like Fannie Mae and Freddie Mac. These bodies help lower the cost of these forms of loans. This allows US mortgages to be held and traded by investors globally. In contrast, variable-rate and short-term fixed-rate loans are more prevalent outside the US because banks hold the loans on their balance sheets funded by bank deposits.
The 30-year fixed mortgage rate, a longstanding pillar of the US housing market, became even more popular following the housing crash of 2008. Various measures intended to limit risky lending practices, nearly 80% of US subprime mortgages issued pre-bubble burst were adjustable-rate mortgages, have fostered the shift towards more stable mortgage products.
Consequently, American homeowners have become better equipped to withstand the impact of interest rate hikes as compared to their international counterparts.
Moreover, Morgan Stanley categorizes most US homeowners as “strong hands” in this cycle because nearly 40% of US houses are owned outright without any mortgage debt. This can be attributed to the large baby boomer generation transitioning from working years into retirement, resulting in fewer households carrying mortgage debt.
Given this shift, there has been a substantial decrease in distressed sales and foreclosures. This, coupled with a lack of homeowner distress, has helped national home prices remain stable despite doubling mortgage rates.
However, while a large proportion of homeowners’ monthly mortgage payments are not directly affected by spiking interest rates, their employment status might not enjoy the same protection. If a recession was to hit the US economy, the recent trend of rate hikes could potentially put a strain on recent homeowners, particularly those without significant savings.
Furthermore, while US homeowners might be less vulnerable to spiked interest rates, borrowers with variable-rate credit cards have not been so fortunate. Indeed, instances of credit card stress and loan delinquencies are on the rise.
