The red line in the FRED graph above shows that the average fixed rate for a 30-year mortgage began to climb significantly in the third quarter of 2021 and, by 2022, had returned to levels not seen since 2001. Although these rate increases have affected interest payments for new mortgages, the blue line shows that the share of household income devoted to mortgage payments overall is still in line with its 2015-2019 trend.
Though this divergence between average rates and debt service might seem counterintuitive, consider the effects of higher mortgage rates on the housing markets. As mortgage rates rise, homeownership becomes more expensive for prospective buyers. Those eager to build or purchase their first home may wait for rates to fall. Existing homeowners may also be dissuaded from re-entering the market, especially if they’d have to give up their current low-rate mortgage that they originated years earlier. In other words, higher mortgage rates have a broad chilling effect on housing markets.
This aversion to high rates is borne out in the data on mortgage originations. The FRED graph below shows that, as the average mortgage rate began to ascend, new mortgage lending began to decline. And despite the rise in interest rates for new mortgages, existing home owners have overwhelmingly retained low interest rate loans that originated prior to 2021.
Thus, changes in rates and lending essentially offset each other and, coupled with the high number of existing low-rate mortgages, mortgage debt service as a percentage of income did not grow proportionally with interest rates. It’s possible that a decrease in mortgage rates, even if they remain high by recent standards, will entice buyers to reenter the market; if so, home sales and mortgage lending would grow again, and mortgage debt service payments would rise.
How these graphs were created: First graph: In FRED, search for and select “Mortgage Debt Service Payments as a Percent of Disposable Personal Income.” From the “Edit Graph” panel, use the “Add Line” tab to search for and select “30-Year Fixed Rate Mortgage Average in the United States.” Use the “Edit Line” tab to edit line 2 and change the frequency to “Quarterly.” You can also change the date range above the chart to begin on March 31st, 1985. Second graph: In FRED, search for and select “Large Bank Consumer Mortgage Originations: New Originations.”
Suggested by Charles Gascon and Joseph Martorana.
