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Can a mortgage product tainted by the financial crisis come back to revive US housing? The answer could reorient the housing market and give the Federal Reserve greater control over consumer spending in the years ahead.
A lack of affordability has hindered housing transactions, frustrating would-be buyers and, more recently, hammering the stocks of developers. Those waiting for popular 30-year mortgages to sink to what's considered a reasonable rate - around 5.5% by my estimation - have been repeatedly disappointed. To the surprise of many, loan rates climbed after the Fed began easing monetary policy
. Indeed, the mortgage market may be ready for a fundamental reshaping in an world where sticky inflation and hefty government borrowing keep longer-term interest rates elevated. The outsized concentration of homebuyers in 30-year fixed-rate mortgages is an anomaly. In the two decades prior to the 2008 financial crisis, a fifth of homebuyers, on average, opted for adjustable-rate mortgages, which reset after a few years, deciding based on the difference between short- and longer-term interest rates. But following the crisis and until mid-2022, there was no reason to shop around. Rates on 30-year mortgages were kept ultra-low by an extraordinary and extended period of monetary stimulus. That became the new normal for homebuyers and ARMs went out of favor.
This may start to shift given how stubbornly the 30-year has clung to levels near 7%, and as a cooling economy raises the prospect of further Fed rate cuts. The central bank has greater influence over the front end of the yield curve in a conventional easing cycle – and, with it, ARMs – than the 10-year Treasuries to which 30-year mortgage rates are tied.
10-year Treasury yields were 0.5 percentage point lower than two-year yields. Today, the 10-year is higher by 0.30 percentage point, still a far smaller gap than existed in the early 2000s.
ARMs were big drivers of the housing market in those years. For a time, they accounted for as much as a third of home-loan applications before falling out of favor during the sub-prime mortgage crisis, which left bitter memories of homeowners getting into trouble when their rates reset higher. The 2010s were also marked by low longer-term interest rates and relatively good housing affordability in most of the country.
For affordability-stretched first-time homebuyers today, the financial crisis is ancient history. And various issues hanging over government bond markets suggest that, even in a mild recession, 10-year Treasury yields look unlikely to return to the low levels that persisted from the financial crisis up to the pandemic.
The government's outstanding debt is $36 trillion and growing. De-globalization is putting upward pressure on inflation. And, more recently, German bunds drove a global selloff in sovereign bonds as investors estimated that shifting US foreign policy would lead countries to borrow more to spend on defense.
Even when investors have priced in significant Fed easing, with a terminal rate as low as 2.75%, the 10-year yield has barely fallen below 3.5%. This was the case during the failure of Silicon Valley Bank in 2023 and at the start of Fed policy easing.
If the 10-year struggles to fall below 3.5% during a Fed easing cycle, it's unlikely 30-year fixed-rate mortgages would drop below 5.5%. But a 5/1 ARM - that's fixed for 5 years and then adjusts every year thereafter - may well fall into the mid-4s. That has the potential to unlock a lot of housing demand from homebuyers even as it exposes them to interest-rate risk in the future.
Shorter-term or adjustable mortgages are common in the rest of the world, and they make monetary policy more potent. One reason the economy remained immune to the Fed raising rates quickly and significantly in 2022 and 2023 is because most homeowners have fixed-rate mortgages, so their monthly mortgage interest payment didn't rise. About 96% of home loans in the US are long-term fixed-rate mortgages, while variable-rate and short-term fixed-rate mortgages are most prevalent in other countries, according to the Dallas Fed.
A housing market where more borrowers have ARMs would be more exposed to changes in Fed policy, albeit after an initial multi-year fixed-rate period. This would give the central bank greater control over household spending at pivotal moments for the economy.
In the shorter term, such a shift from homebuyers may help unlock a broadly frozen housing market.
(COMMENT, BELOW)
Sen is a portfolio manager for New River Investments in Atlanta and has been a contributor to the Atlantic and Business Insider.
Previously:
• 03/1/26: Health care can't be the only job in town. But it is
• 01/14/26: This is not the way to make housing more affordable
• 12/30/25 The housing market is moving in favor of Gen Z
• 12/26/25 The South's biggest economic draw is slowly coming back
• 04/08/25 Where will consumers go?
• 09/17/24 U.S. 'Battery Belt' will be a new kind of job magnet
• 09/10/24 Americans have a new piggy bank to raid --- their houses
• 10/03/23 America's greatest public policy success is now in jeopardy
• 09/12/23 The housing market is tilting in favor of renters
• 08/18/23 RIP recession. Is it time to worry about
• 05/24/23 This Goldilocks economy has an end date
• 05/24/23 Bye-Bye, New York. Hello, Fayetteville
• 04/04/23 What makes this economic slowdown different from the others?
• 02/15/23 Higher mortgage rates is what the housing market needs now
• 01/06/23 The January inflation bump Americans should welcome
• 01/04/23 Why millennials are following boomers to the South
• 10/24/22 Two bright spots in a cooling housing market
• 08/18/22 Future remote workers need to network more --- in college
• 06/17/22 Housing market cooldown will only lead to more dysfunction
• 05/27/22 Welcome to our be-careful-what-you-wish-for economy
• 05/04/22 The Amazon economic indicator says inflation is easing
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• 12/31/20 Just send the bigger bucks already
• 08/24/20 Young people can't buy homes until older owners . . . move on
• 08/18/20 Our pandemic love affair with e-commerce could soon sour
• 08/10/20 Booming 'zoom towns' should ease city housing costs
• 07/11/20 With a Biden economy, will America be condemned to relive the '70s?
• 07/14/20 Renting and homebuying swap roles in the covid-19 market
• 07/13/20 Markets may have a reason to rise along with covid-19 cases
• 04/27/20 U.S. economy may have hit the coronavirus bottom
• 11/12/19 The 2020 economy should feel a lot better: What to, realistically, expect
• 04/23/19: Gen Z is likely to temper aging socialist millennials
• 03/25/19: All signs point to a housing boom ahead
• 02/19/19: Trump's economic gamble might make sense
• 02/15/19: Scaring off Amazon will backfire for the Left
• 01/29/19: The 2020 election will shred the Obama coalition
• 11/15/18: Amazon proving the 'rich get richer'?
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• 10/22/18: The politics of the next recession will be a disaster
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• 05/03/18: Changing housing needs of millennials will change economic development
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• 02/07/18: Dems are caught in a tax bill trap this year
• 10/25/17: Good times have come to Trump-leaning states