A recent study conducted by economists Jack Liebersohn and Jesse Rothstein, as detailed in a new National Bureau of Economic Research paper, highlights the significant economic impact of high mortgage rates in the United States. The researchers found that the burden of high borrowing costs has deterred many prospective home buyers from moving in recent years, particularly in 2022 and 2023 when rates were at a multi-decade high.
The phenomenon known as the "lock-in effect" has caused existing homeowners to hold onto ultra-low rates they secured years ago, further contributing to the stagnation in the housing market. Liebersohn and Rothstein estimated that the increase in Americans who did not move due to high borrowing costs resulted in a deadweight loss of around $20 billion in 2023.
Moreover, households that did move during this period faced higher mortgage rates, leading to an additional $215 billion in extra costs through the entire period. Despite a slight cooling off of rates from their peak in late 2023, borrowing costs remain elevated, with the 30-year fixed rate currently at 6.7%.
The impact of high mortgage rates on the housing market has been evident, with housing demand remaining weak and existing home sales dropping 5.4% year-over-year in June. This decline, although less severe than the 19.3% drop recorded in June of the previous year, underscores the ongoing challenges faced by the real estate sector.
While there are expectations for rates to continue easing throughout the year, the lasting effects of high mortgage rates on the economy and the housing market are likely to persist. As policymakers and industry experts navigate this complex landscape, finding solutions to address the economic implications of high borrowing costs will be crucial in supporting a more robust and resilient housing market in the future.