Below-market mortgage rates curb household mobility by 17 percent

Following rapid monetary tightening in 2022, over 80 percent of outstanding U.S. 30-year fixed-rate mortgages held interest rates at least two percentage points below prevailing market rates, remaining above 45 percent through 2025.

This rate gap created significant lock-in effects, reducing overall household mobility by 16 to 17 percent between 2022 and 2023.

Beyond household relocations, the reduction in housing supply raised transacted house prices by 5 to 10 percent on average, with price impacts reaching 22.6 percent in supply-inelastic superstar cities.

The literature demonstrates that locked-in homeowners avoid downsizing and own-to-rent transitions, contracting the pool of available properties for sale and spilling over into rental markets where asking rents increased by 0.35 percent for every one percent expansion in the local mortgage payment gap.

To resolve lock-in frictions, researchers evaluate three principal mortgage contract modifications.

Mortgage portability allows borrowers to transfer existing low-rate loans to new properties, though it increases loan extension risk for investors.

Broadening loan assumability enables buyers to acquire seller mortgages, but requires high down payments and lender approval.

Alternatively, adopting Denmark's delivery option permits homeowners to repurchase loans at market value when interest rates rise, eliminating lock-in incentives at an estimated initial borrowing cost of 20 basis points.