Julia Fonseca, assistant professor of finance at Gies College of Business, was recently interviewed for a New York Times article, “New Home Construction Slows as Mortgage Rates Remain High.” In the article, Fonseca draws upon her recent research on mortgage rates to shed some light on how those rates affect new home construction and how that might affect first-time home buyers.

“What the Fed will do is looming large for a lot of different actors in the economy, including for builders,” Fonseca told the Times, noting that first-time home buyers are being ‘squeezed from all sides’ with high prices, high interest rates, and low inventory. “If new construction is not happening, that could drive prices up even further.”

Fonseca has devoted much of her research during her time at Gies to examining the up and down terrain of mortgages and the very real impact they can have on families.

Fonseca and Lu Liu (University of Pennsylvania) wrote a working paper titled “Mortgage Lock-in, Mobility, and Labor Reallocation,” which examines the impact mortgage rates have on labor reallocation and mobility. In other words, what effect do mortgage rates have on the decision-making process when an individual is considering moving – in particular for new job opportunities.

According to Fonseca, by March 2023, about two thirds of borrowers had locked in a mortgage rate that was under 4 percent. Higher interest rates today substantially raise the monthly payments for new mortgages.  

Additionally, these increases could affect workers’ advancement. If someone had the opportunity for a new job, but would need to move, these rate increases would have a significant, measurable impact on workers’ mobility.

“If you move, you have to pay off your loan at this very low rate and take on a new loan at a new rate, which can be very costly,” Fonseca said. “For the typical borrower, a one percentage point rise in rates increases payments by about $1,900 a year. If you have 20 years left on your mortgage, and you don’t refinance later on, that means that the present value of the payments you are going to make on your mortgage are going to increase by about $27,000. That’s a lot of money. And that creates a strong incentive for people not to move.”

As Fonseca’s research indicated, the greater the difference between a mortgage rate a homeowner currently has and the rate they would need to get if they moved, the greater the financial impact on the workers. This was an incentive to not move for the new opportunity. It was financially advantageous to stay where they were. This suggests that lock-in is preventing them from pursuing these labor market opportunities that would have been worthwhile otherwise. It could keep workers from finding the best jobs. It could keep firms from finding the best workers. And so that could have real consequences for labor markets and labor productivity.