Asset Freeze

The vast majority of cars and houses bought by people in the United States are financed. Interest rates are soaring to help reign in inflation. The net effect of all of this is similar to rent control, in that people are financially locked into the assets like homes and cars that we already have.

No one questions that higher interest rates reduce the demand curve. Higher interest rates mean higher monthly loan or mortgage payments which make purchasing less attractive. Mortgage rates have nearly doubled in 12 months, increasing the average mortgage payment for any given loan amount by nearly 40 percent. The monthly payment for $400k home, assuming 20% down, has gone from about $1600 to $2200 in just months. That’s bound to slow down a market in which the vast majority of buyers are getting a mortgage. But if you’re already an owner of a home, auto, or any other large financed asset, you have even more to lose.

Existing asset holders also have the opportunity cost of giving up their lower financing rate. In a market in which interest rates have been flat for some time, there should be relative neutrality if one wants to move from one $400k house to another. There are moving costs and broker fees to take into account, but those pale in comparison to the costs associated with the recent mortgage rate increases. Let’s look a specific example.

Imagine someone bought a home they thought they would stay in for many years just a year ago for $600k, and hates it. A year ago, their mortgage payment would have probably been around $2600. Today, buying a house at the same price, their mortgage payment would be closer to $3200. In order to keep their mortgage payment the same, they would have to buy a house worth only $480k. I’m not taking into account property price appreciation, as they would likely net a bit of an increase due to the unusual dynamics of the recent housing market, but any house they would buy in the same market would have likely been subject to similar appreciation, so I can compare prices from a year ago and assure you the math holds, except that you might finance a little less due to having more money for a down payment.

It would be a tough pill for anyone to swallow to pay the same price for a lesser home. Current home and car owners have to consider not only that higher interest rates make it more expensive to buy new assets, but also they if they sell an existing asset to buy a new one, that they need to give up significantly more favorable loan terms if they give up their existing asset.

I financed my Mazda at 0% and my Lotus at just over 1%. If I sell either, I give up loan terms that are very favorable compared to the current market. For those with houses, this effect is way more extreme, especially if house prices stop going up and begin to retreat in some markets.

In San Francisco, people have held on to rent controlled apartments far longer than they wanted to because the cost of moving and having to pay market rents is so steep. Often, people stick to apartments they really don’t like when they could afford something better because they just can’t swallow giving up such a good deal, whether still a fit for their lifestyle of not. This new higher interest rate environment has a similar effect on every owner of a financed asset.

The net result of this for many peoples is a sort of asset freeze. Whatever you currently have that was financed in a low interest rate environment, you’re heavily incentivized to keep. People will be trading cars and moving houses less for the foreseeable future. I feel for those who don’t like what they have, as they will feel pressured to hang on to what they have for longer than they want.