# The Mortgage Divide: Why America’s Housing Market Is Splitting in Two!

An episode of [Patrick Boyle On Finance](https://invisiblenetwork.ai/podcast/1547740313), 26 Aug 2025, 20 min.

Audio: https://traffic.megaphone.fm/APO8314724515.mp3

Why are some homeowners thriving while others are struggling to keep up? In this video, we explore how America’s housing market has fractured—creating a sharp divide between those who locked in low mortgage rates and those buying today at much higher costs.We’ll unpack:The lock-in effect and its impact on geographic mobilityWhy millennials face deeper inequality within their own generationHow renters are absorbing the full brunt of housing inflationThe role of tariffs, interest rates, and investor behaviorInternational comparisons with the UK and ChinaWhy your mortgage might be the most important financial instrument you ownFrom sticky inflation to shifting migration patterns, this is the story of how housing finance is reshaping the American economy—and the lives of millions. Patrick's Books: Statistics For The Trading Floor: https://amzn.to/3eerLA0 Derivatives For The Trading Floor: https://amzn.to/3cjsyPF Corporate Finance: https://amzn.to/3fn3rvC Ways To Support The Channel: Patreon: https://www.patreon.com/PatrickBoyleOnFinance Buy Me a Coffee: https://www.buymeacoffee.com/patrickboyle

## Transcript

[0:00] The cost of buying a home in the United States has increased
[0:03] sharply in recent years. While prices have gone up, the
[0:07] more dramatic shift in affordability has come from
[0:10] mortgage rates. This change has created a wealth
[0:14] divide between home owners who locked in low rates in 2020 and
[0:18] 2021 and those entering the market today.
[0:22] Even a seemingly small increase in mortgage rates can sharply
[0:27] hike mortgage payments. On a $400,000 loan, a jump from
[0:31] 3% to 7% increases the monthly payment from $1686 to $2661.00.
[0:41] Buyers today not only have to finance $90,000 more on average
[0:47] than those who bought five years ago, but they have to do it at
[0:50] more than twice the interest rate.
[0:53] The result is a wealth divide between those with low interest
[0:57] rate mortgages locked in for decades and those who bought
[1:01] more recently at higher prices and higher interest rates.
[1:05] According to Redfin, Americans have started staying in their
[1:09] homes much longer than ever before, with many staying put
[1:13] because it makes no financial sense to trade their low rate
[1:17] mortgage for a much more expensive one, which would
[1:20] happen if they moved house. We've seen bad consumer
[1:24] sentiment surveys for roughly 2 years now, with fears of
[1:28] unemployment and inflation expectations at levels last seen
[1:33] during the global financial crisis, meaning that Americans
[1:37] are quite worried about their financial futures.
[1:40] Household debt hit a record high this year, but despite all of
[1:45] this gloom, the American consumer appears to keep on
[1:48] spending. Home Depot reported a 5% rise in
[1:53] net sales this quarter, even as the number of transactions fell
[1:57] to an 8 year low. It would seem that economic
[2:01] anxiety is best treated with a trip to Home Depot and a new
[2:05] patio set. Walmart warned about inflation
[2:09] this week, but still raised it's sales guidance for the year.
[2:13] American Express noted on an earnings call that our card
[2:17] members may say that they don't have any confidence in the
[2:20] economy, but they still continue to spend.
[2:24] If home buyers and borrowers are feeling squeezed, consumers are
[2:28] worried about inflation and job losses, and delinquencies on car
[2:33] loans and student debt are rising, why are Americans still
[2:37] spending? One factor is this divide in
[2:40] housing costs for homeowners in identical properties with
[2:44] similar incomes who bought maybe just a year apart from each
[2:48] other might have dramatically different payments.
[2:52] A real estate agent that I spoke with last year described buyers
[2:56] stretching to afford payments, banking on future rate cuts to
[3:00] refinance. It's the financial equivalent of
[3:03] buying a yard and hoping that the Marina fees go down over
[3:07] time. It's quite worrying if the
[3:09] expectation the 30 year rate will definitely come down has
[3:14] become part of buyers expectations.
[3:17] Another reason that consumer spending has been so strong in
[3:20] the United States despite the higher interest rates is that
[3:24] the unemployment rate is very low today and it has been very
[3:28] low for a few years now. On top of that, asset prices are
[3:32] high, meaning that savers and investors have been seeing their
[3:36] wealth grow. 65% of Americans own homes, and 40% of American
[3:42] homeowners own their homes outright, so a big chunk of
[3:47] American homeowners don't have to worry about interest rates at
[3:50] all. There was a huge boom in
[3:53] mortgage refinancings when interest rates were low and
[3:56] during that period most existing homeowners who had mortgages
[4:00] refinanced and will be enjoying low financing costs for decades
[4:05] to come. If we make the reasonable
[4:08] assumption that long term homeowners incomes have been
[4:11] growing at the average rate of income growth in the United
[4:14] States, they will be spending less than 9% of their income on
[4:19] housing. On the other hand, those who
[4:22] bought in the last three years find themselves spending about
[4:25] 1/4 of their income on their mortgage payment.
[4:28] So not only do we have the haves and have nots of renters versus
[4:32] homeowners, we also have the haves and have nots of those
[4:36] with low versus high interest rate mortgages.
[4:40] The cost of housing is only part of the story.
[4:43] Let's look at how the mortgage divide is influencing consumer
[4:47] behaviour, why regional housing markets are diverging, and how
[4:51] the lock in effect is reshaping migration patterns in the United
[4:55] States. We'll also explore how
[4:58] inequality among millennials is widening, sometimes more
[5:02] dramatically than the gap between millennials and boomers,
[5:06] and examine the strategies homeowners are using to think
[5:11] about their mortgages not just as debt but as financial
[5:14] instruments. The consumer balance sheet in
[5:17] the United States presents a bit of a mixed picture.
[5:21] On the surface, debt service ratios are quite low and
[5:26] spending is strong. But when you dig a bit deeper,
[5:29] some signs of strain are starting to show.
[5:32] Delinquencies in subprime auto loans have been rising steadily
[5:36] over the last three years, reaching a 15 year high this
[5:40] year. As of January, 6.6% of subprime
[5:44] borrowers were at least 60 days past due.
[5:48] This is the highest rate since Fitch began tracking that data
[5:52] in 1994. Unsecured credit card
[5:55] delinquencies have been rising too, with the sharpest increases
[6:00] among cards issued between 2021 and 2023.
[6:04] The financial pressure is concentrated amongst recent
[6:08] borrowers and lower income households whose balance sheets
[6:12] are more exposed to rate hikes and inflation.
[6:16] On top of this, consumer spending has been distorted this
[6:20] year as consumers rushed out to buy durable goods before tariff
[6:25] price increases hit. According to Morgan Stanley, a
[6:29] lot of the growth in consumer spending in the first quarter
[6:32] likely reflected hasty buying ahead of expected inflation,
[6:37] especially amongst higher income households.
[6:41] McKinsey survey found that 91% of consumers were aware the
[6:46] tariffs were coming, and many adjusted their spending habits
[6:50] buying goods before price hikes hit store shelves.
[6:54] One of the more interesting effects of the spike in mortgage
[6:57] rates, however, has been how they're influencing geographic
[7:01] mobility within the United States.
[7:04] Homeowners with low interest rate mortgages are extremely
[7:08] reluctant to move, even for better job opportunities.
[7:12] This behaviour is reshaping migration patterns and
[7:15] contributing to regional imbalances in housing supply and
[7:19] demand. The migration from northern
[7:22] states to the Sun Belt, which started long before the
[7:25] pandemic, has been disrupted by higher interest rates and the
[7:30] lock in effect leaving colder regions, in particular in the
[7:34] North East with unusually tight inventories of homes available
[7:39] for sale. Meanwhile, Florida and Texas,
[7:42] the states people rushed to during the pandemic, are seeing
[7:46] some of the steepest inventory increases in the country, with
[7:50] several metro areas showing year over year price declines.
[7:54] While home owners as a group have seen their balance sheets
[7:58] improve as rates have gone up, renters have absorbed the full
[8:02] brunt of the housing inflation, and not just in the United
[8:06] States. Across advanced economies, rents
[8:09] have been rising at their fastest sustained pace in
[8:12] decades, around 5% annually, according to the Federal
[8:17] Reserve. Median monthly rents in the
[8:19] United States jumped 10% in 2023, contributing to a surge in
[8:25] homelessness and widening the gap between renters and owners,
[8:30] According to The Economist, In recent years, American home
[8:34] owners increased their spending on things like hobbies and
[8:37] eating out by 25% in nominal terms, while renters increased
[8:43] their leisure spending by only 16%.
[8:46] One of the biggest problems affecting affordability in the
[8:50] United States is that America's housing market has been stuck in
[8:54] a supply shortfall for years. US home builders added 1.4
[8:59] million new homes in 2023, which was the highest number since
[9:04] 2007, but that was not enough to serve the 1.8 million new
[9:09] households formed that year. Builders in the United States
[9:13] have been struggling with rising material costs, labor shortages
[9:18] and zoning restrictions that slow progress and inflate house
[9:22] prices. The new tariffs can be expected
[9:26] to push construction material prices even higher and anti
[9:30] immigration policies will reduce the number of skilled
[9:33] construction workers in the country.
[9:35] As when we look at the different sectors of the US economy, the
[9:39] sector with the highest percentage of foreign born
[9:41] workers is construction. Now, on the other hand, Trump
[9:46] has promised to open up tracts of federal land for housing
[9:50] construction and to speed up permitting.
[9:53] In the wake of the Liberation Day celebrations in April,
[9:57] single family home starts fell 12% compared to a year earlier.
[10:02] This sudden drop was driven by home builders nervousness over
[10:06] tariff volatility, as if they bought supplies when tariffs
[10:10] were high only to see them fall later, they would find
[10:14] themselves building homes with a higher cost basis than their
[10:17] competitors. There's been a lot of talk in
[10:20] recent years about institutional purchases of homes and how
[10:24] that's pricing out new buyers. According to the National Rental
[10:29] Home Council, large investors made 0.74% of single family home
[10:35] purchases in 2021, meaning that someone other than a large
[10:40] investor purchased 99.26% of single family homes.
[10:45] According to data from Redfin, real estate investors have been
[10:49] cutting their purchases as higher interest rates aid into
[10:53] potential profits. Despite the frequently cited
[10:56] negative effects of investor purchases of homes, research
[11:00] shows that large institutional investors typically buy homes in
[11:05] need of repair and upgrade them to rent them out.
[11:08] The homes bought by investors are not left unoccupied, so
[11:12] while they reduce the number of owner occupied homes in the
[11:15] neighborhood, they increase the supply of homes available to
[11:19] renters who might otherwise not be able to afford to live in
[11:23] predominantly owner occupied neighborhoods.
[11:26] Overall, the effects of investors on the housing market
[11:30] are mixed, according to Redfin data, While large corporate
[11:35] buyers have pulled back from real estate investments, smaller
[11:39] firms and individual investors are still active buyers,
[11:43] particularly in the Southeast and Southwest.
[11:46] They say that these investors have a preference for investing
[11:50] in low priced homes and condos, which starter homes making up
[11:54] 40% of investor purchases. One of the big trends in the
[11:59] housing market which is frequently discussed is the fact
[12:02] that one out of three homes in the United States is owned by
[12:06] people over the age of 65. The percentage of retiree
[12:10] homeowners had stayed flat for decades, but began to surge
[12:14] starting in 2012. This group are particularly
[12:18] concentrated as a percentage of homeowners in the Northeast,
[12:22] where their tendency to age in place rather than to move to
[12:26] retirement communities has grown over time.
[12:29] This concentration of ownership amongst older generations has
[12:34] deepened the generational wealth divide, but increasingly the
[12:38] sharper fault line is within generations themselves.
[12:43] As John Byrne Murdoch explained in the Financial Times, while
[12:47] the average millennial in the United States had 30% less
[12:51] wealth than the average boomer by the age of 35, the wealthiest
[12:55] 10% of millennials are now 20% richer than the wealthiest 10%
[13:00] of boomers were at the same age. In the UK, the top decile of 30
[13:06] somethings holds 300,000 lbs in property wealth, nearly triple
[13:11] that of the wealthiest boomers at the same age.
[13:14] Much of this advantage is inherited. 36% of young American
[13:19] homeowners received family financial help to buy their
[13:23] first home, and among UK recipients, the top 10% received
[13:28] 170,000 lbs, compared to an average gift of 25,000 pounds.
[13:34] These transfers compound over time.
[13:38] A larger deposit not only lowers monthly payments, but also
[13:42] reduces total interest paid, doubling the value of the
[13:46] original gift. As Byrne Murdoch notes, home
[13:49] ownership in the US is becoming increasingly hereditary, just as
[13:54] it is in Britain. The result is a growing divide
[13:58] between millennials with access to capital and those without,
[14:03] one that is increasingly visible and increasingly better.
[14:07] A home is often the largest investment that a household will
[14:11] make, and the mortgage used to finance it becomes the most
[14:15] consequential financial product in a person's portfolio.
[14:19] Fixed rate mortgages resemble bonds.
[14:22] Their value shifts when interest rates change, even though the
[14:26] repayment schedule remains constant.
[14:29] Floating rate mortgages behave more like corporate loans,
[14:33] adjusting in real time and maintaining a stable present
[14:36] value. These structures influence the
[14:39] composition of a household's broader financial portfolio.
[14:44] As The Economist noted in a recent article, a home owner
[14:48] with a fixed rate mortgage worth 20% of their savings and the
[14:51] classic 6040 stock bond allocation is effectively
[14:56] holding a 6020 portfolio. The mortgage offsets their bond
[15:00] exposure. For first time buyers with
[15:03] little savings, the leverage effect is even more pronounced.
[15:08] Their portfolios resemble those of hedge funds, heavily
[15:12] leveraged long equities and structurally short fixed income
[15:16] securities. The decision to repay early
[15:19] then, hinges on opportunity cost.
[15:22] Historically, investing spare cash in equities has
[15:26] outperformed early repayment. A $1000 repayment in 2005 would
[15:33] have saved $1800 in interest. The same amount invested in a
[15:38] global index fund yielded $6500. With interest rates elevated and
[15:45] equity valuations high, the balance between risk and return
[15:49] is shifting. The Economist argues that
[15:52] households should think of their mortgage as an important part of
[15:55] their investment portfolio, rather than just thinking of
[15:58] their their home as an investment.
[16:01] In most parts of the world, 30 year fixed rate mortgages are
[16:05] extremely rare or entirely unavailable.
[16:09] British and European borrowers can usually only fix their
[16:12] mortgage rate for two or five years, exposing them to frequent
[16:17] refinancing risk and rate shocks.
[16:20] The expiration of ultra low rates in Europe has already
[16:24] triggered a wave of rising mortgage bills.
[16:27] In China, the structure is different again.
[16:30] Home ownership surged through state LED reforms in the 1990s,
[16:35] but the Chinese real estate market is now burdened by debt
[16:38] distress, unfinished developments and falling prices.
[16:42] The Chinese model concentrated household wealth in real estate,
[16:47] often bought with massive leverage, and this is now
[16:50] undergoing a painful unwinding. These contrasts reveal how
[16:55] deeply mortgage design influences broader financial
[16:59] behaviour, wealth distribution and economic resilience.
[17:04] America's long term fixed rate mortgage offers stability but
[17:08] also creates lock in effects when interest rates rise and can
[17:12] amplify inequality based on when a home owner financed their
[17:16] purchase. State LED housing booms can
[17:19] accelerate wealth accumulation to begin with, but also
[17:23] concentrate risk. The design of mortgage systems,
[17:27] to a certain extent reflects national priorities and
[17:31] determines how households build, preserve or lose wealth.
[17:35] Market chatter around Federal Reserve rate cuts has
[17:39] intensified, but the structure of the US mortgage market limits
[17:43] how much relief home buyers can expect.
[17:46] Most 30 year mortgage rates are tied to long term Treasury
[17:50] yields, which respond to inflation expectations and
[17:54] investor sentiment, not directly to short term Fed moves.
[17:59] Even as the Fed signals caution, mortgage rates remain near 6.75%
[18:05] and and Redfin economists expect them to stay in that range
[18:09] through year end. Meanwhile, the housing market is
[18:13] shifting. There are now roughly half a
[18:16] million more sellers than buyers and pending sales are down, but
[18:20] prices have not meaningfully declined.
[18:23] Sellers are adjusting slowly, with asking prices rising 2.2%
[18:29] year over year, the smallest increase in nearly two years but
[18:33] still an increase. Buyers appear to hold more
[18:37] leverage, and many remain hesitant, backing out of deals
[18:41] or waiting for deeper price cuts that may not materialize.
[18:45] This imbalance reflects deeper structural forces.
[18:49] Inflation remains sticky, especially in the US where
[18:53] fiscal expansion and tariff policies continue to push up
[18:56] costs. mortgage-backed securities, most of which are
[19:00] government guaranteed, anchor the system but also tie it to
[19:04] broader macroeconomic risks. The result is a housing market
[19:09] caught between policy expectations and financial
[19:12] reality. For future buyers, the promise
[19:15] of lower rates may not translate into affordability.
[19:19] For policy makers, the challenge lies in aligning monetary tools
[19:24] with the realities of housing finance.
[19:27] Thanks for tuning into this week's podcast, which is
[19:30] entirely supported by viewers like you on Patreon.
[19:33] If you'd like to support the podcast, I'll leave a link in
[19:36] the show notes. Have a great week and talk to
[19:39] you again soon. Bye.

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