During the pandemic, many households refinanced their mortgages at lower interest rates. As a result, 22% of mortgages today have an interest rate below 3%, up from 1% of all mortgages in 2019, see chart below.
The locking in of lower mortgage rates has weakened the transmission mechanism of monetary policy, and it is the reason why Fed hikes have not had a more significant negative impact on the housing market.
The bottom line is that Fed hikes are not having the desired effect because households have locked in low levels of mortgage rates during the pandemic. As a result, the Fed will have to keep interest rates higher for longer to slow down the economy and get inflation back to 2%.
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