The average rate on an American mortgage that already exists is about 4.5 percent. The average rate on a new one, as of 8 October, is 7.40 percent.
Hold those two numbers next to each other. Almost everything about this market falls out of the gap between them.
Because moving house does not just mean buying a different house. It means giving up the loan you have and taking the loan on offer.
What the gap costs
Put it in dollars, because percentages hide this.
Take a $400,000 mortgage, thirty years, nothing exotic. At 4.5 percent the payment is about $2,027 a month. At 7.40 percent the same loan costs about $2,770.
That is $743 more a month. Just under $8,900 a year.
So a homeowner wants a bigger place. Or a job in another city. Or a smaller place after the children leave. Each one is quoted a fee for the privilege. The fee is $743 a month, for thirty years.
Most people decline.
What that does to a market
Existing home sales are running near 4.2 million a year. The long run average is about 5 million.
Research puts the sales the lock-in is preventing at roughly 870,000 this year alone.
And the houses are there. As the earlier dispatch counted, 3.56 million units sit vacant while 745,652 people have nowhere to live.
That is the definition this site was built around. A counterfeit shortage is one where the goods are present and unreachable. From the outside it looks exactly like the real thing.
Housing is the cleanest one currently on the board. Cleaner than care, cleaner than munitions. There is not even a partial physical constraint to argue about.
Why it is getting worse right now
Here is the part that has changed in the last three weeks. It is the reason to write this today rather than last year.
The thirty year mortgage has risen for seven straight weeks. It was 7.28 percent a week ago and 7.40 percent now. A year ago it was 6.30.
Mortgage rates are not set by the Federal Reserve. They track the ten year Treasury, and the ten year has gone from 4.94 percent in mid September to about 5.28 percent now.
One market commentary described the cause as a wicked brew of inflation expectations, a broad bond selloff, and rising deficits requiring new issuance.
Read that list again. Not one item on it is a Federal Reserve decision.
| What moved | Mid September | Now |
|---|---|---|
| Ten year Treasury | 4.94% | 5.28% |
| Thirty year mortgage | 6.95% | 7.40% |
| Fed policy rate | Raised once, to 3.75 to 4.00 | Unchanged since |
The Fed moved once. The mortgage moved 45 basis points. It did that on inflation and on the government's borrowing, which is the loop the forward reading described.
The trap
Which brings the argument to the thing everyone proposes.
Cut rates and thaw the market. It sounds obviously right. A frozen housing market is a monetary problem, money is the Fed's job, so let the Fed fix it.
But the Fed does not set the mortgage rate. It sets an overnight rate for banks. And as this site argued last month, the long rate is mostly a forecast of inflation over the life of the loan.
So a cut delivered under political pressure, with inflation at 3.4 percent, tells the bond market one thing. That the central bank will tolerate more inflation than it said.
And the thirty year rate, which is that forecast written as a number, goes up.
The evidence for this is not theoretical. On 16 September the Fed raised. The ten year fell six basis points from a nineteen year high, because the market believed it.
What actually thaws it
Three things can close the gap, and only one of them is pleasant.
The first is time. The average outstanding rate has already drifted from 3.8 percent in 2022 to 4.5 percent now. Old loans end and new ones replace them. The lock-in decays on its own. Slowly, over years.
The second is lower inflation. Not a rate cut, but the thing a rate cut is supposed to signal. If the price level settles, the long rate follows it down, and the gap closes from the top.
The third is a bad recession, which closes the gap by destroying the demand rather than the obstacle. Nobody should want this one and it remains on the list.
What is not on the list is building more houses. Building is the right answer to a real shortage and this is not one. Three and a half million units stand empty while the market is frozen. That is about as direct a demonstration as the data will offer.
What would prove this wrong
Three things, all public.
Say existing home sales climb back toward 5 million while the rate gap stays near three points. Then the lock-in is not what is binding. Something else is.
If the Fed cuts and the thirty year mortgage falls with it, the term structure argument is wrong. The obvious remedy was obvious for a reason.
And say housing starts rise sharply while vacancies fall and prices still climb. Then there is a genuine physical shortage here after all. This dispatch will have misread a real scarcity as a counterfeit one.
Two cautions. Estimates of how many mortgages sit below the market rate vary widely by source and threshold. That is why this piece leans on the average outstanding rate rather than on a share. And the $743 figure is principal and interest on one representative loan, not a national average payment. Read it as the shape of the penalty, not anybody's actual bill.