The rise in the share of fixed-rate mortgages over the past four decades is the reason why the transmission mechanism of monetary policy is weaker today, see chart below.
When interest rates go up, it has a milder impact on the economy as mortgages are locked-in at lower interest rates. But this effect is symmetric. When the Fed starts cutting interest rates in September, lowering interest rates will not trigger a strong boost to housing demand because 95% of mortgage holders are already in mortgages with low interest rates. In addition, a record-high 40% of homeowners don’t have a mortgage, which also contributes to making monetary policy less potent.
The bottom line is that the high share of fixed-rate mortgages makes monetary policy less effective both when the Fed raises interest rates and when the Fed lowers interest rates.
Source: FHLMC, FHFA, Haver Analytics, IMF WEO, Apollo Chief Economist
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