High Mortgage Rates May Limit Job Relocation Options As Rising Mortgage Rates Trap Homeowners

Rising mortgage rates increasingly restrict U.S. homeowners from relocating for employment opportunities, as they face higher financial penalties for moving due to previously locked-in lower rates.

A study by Gies College of Business professor Julia Fonseca and Lu Liu of The Wharton School, University of Pennsylvania, found that a one percentage point increase in the difference between mortgage rates over the last decade and current mortgage rates can reduce the likelihood of moving by about 25% by 2033.

This "lock-in" effect, becoming more common amid high mortgage rates, could disrupt labor mobility by limiting the ability of workers to relocate to regions with better job prospects. As homeowners feel financially penalized to move, regions with thriving job markets might not attract the necessary workforce, potentially stunting regional economic growth.

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"The predominant mortgage contract in the U.S., the 30-year fixed-rate mortgage, provides

households with insurance against interest rate increases, but can cause prolonged periods

of mortgage lock-in when mortgage rates rise," the report says. "A reduction in labor

reallocation may affect productivity and inflationary pressures in the medium term, which

is relevant for monetary policy and labor market policies."

The unintended consequences of the lock-in effect triggered by the Federal Reserve's monetary tightening campaign also extend to wage growth. According to the study, households with lower differences between their locked-in mortgage rates and current higher rates are less likely to move for higher-paying jobs and opportunities compared to those with higher deltas.

That inertia, driven by the desire to maintain low mortgage rates, inhibits the effective distribution of labor across regions. As a result, there is a mismatch in the labor market, where individuals may not pursue job opportunities that best fit their qualifications because of the financial burden associated with higher mortgage rates and a drop in overall sales.

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As interest rates on new mortgages climb, the same gap between current low rates and the market rate that prevents someone from moving for a new job can also discourage the homeowner from selling. The study found that for every percentage point the market rate exceeds the homeowner’s original rate, the likelihood of selling the property decreases by about 18.1%.

This has led to a sharp decrease in home sales, with a 57% reduction in transactions involving fixed-rate mortgages in the last quarter of 2023, effectively stalling 1.33 million potential sales from mid-2022 to late 2023.

The lock-in effect reduces the number of homes on the market but also drives up home prices by about 5.7%, further complicating affordability issues.

The study suggests that the dynamic has even broader implications. Those most affected are often first-time homebuyers, minorities, and lower-income individuals who cannot capitalize on opportunities that require relocating.

According to the study, barriers to mobility and their knock-on effects on the labor market point to the need for policies that address the challenges directly.

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