The cost of buying a home in the United States has increased sharply in recent years.

While prices have gone up, the more dramatic shift in affordability has come from mortgage rates.

This change has created a wealth divide - between homeowners who locked in low rates in 2020 and 2021 and those entering the market today.

Even a seemingly small increase in mortgage rates can sharply hike monthly payments.

On a $400,000 loan, a jump from 3% to 7% increases the monthly payment from $1,686 dollars to $2,661.

Buyers today, not only have to finance ninety thousand dollars more on average than those who bought five years ago, but they have to do it at more than twice the interest rate.

The result is a wealth divide between those with low interest rate mortgages – locked in for decades and those who bought more recently at higher prices and higher interest rates.

According to Redfin, Americans have started staying in their homes much longer than ever before, with many staying put because it makes no financial sense to trade their low-rate mortgage for a much more expensive one – which would happen if they moved house.

We have seen bad consumer sentiment surveys for roughly two years now – with fears of unemployment and inflation expectations at levels last seen during the global financial crisis – meaning that Americans are quite worried about their financial futures.

Household debt hit a record high this year – but despite all of this gloom, the American consumer appears to keep on spending.

Home Depot reported a 5% rise in net sales this quarter, even as the number of transactions fell to an eight-year low – it would seem that economic anxiety is best treated with a trip to Home Depot and a new patio set.

Walmart warned about inflation this week but still raised its sales guidance for the year.

American Express noted on an earnings call that “our card members may say they don’t have any confidence in the economy, but they still continue to spend.”

If homebuyers and borrowers are feeling squeezed, consumers are worried about inflation and job losses, and delinquencies on car loans and student debt are rising, why are Americans still spending?

One factor is this divide in housing costs where homeowners in identical properties, with similar incomes who bought maybe just a year apart from each other might have dramatically different payments.

A real estate agent I spoke with last year described buyers stretching to afford payments, banking on future rate cuts to refinance.

It’s the financial equivalent of buying a yacht and hoping the marina fees go down over time.

It’s quite worrying if the expectation that 30 year rates will definitely come down has become part of buyers expectations.

Another reason that consumer spending has been so strong in the United States, despite the higher interest rates is that the unemployment rate is very low today and it has been very low for a few years now.

On top of that, asset prices are high, meaning that savers and investors have been seeing their wealth grow.

65% of Americans own homes and 40% of American homeowners own their homes outright.

So a big chunk of American homeowners don’t have to worry about interest rates at all.

There was a huge boom in mortgage refinancings when interest rates were low, and during that period most existing homeowners – who had mortgages - refinanced and will be enjoying low financing costs for decades ¬to come.

If we make the reasonable assumption that long term homeowners incomes have been growing at the average rate of income growth in the United States - they will be spending less than 9% of their income on housing.

On the other hand, those who bought in the last 3 years find themselves spending about a quarter of their income on their mortgage payment.

So, not only do we have the “haves and have nots” of renters versus homeowners, we also have the “haves and have nots” of those with low versus high-interest-rate mortgages.

The cost of housing is only part of the story - let’s look at how the mortgage divide is influencing consumer behavior, why regional housing markets are diverging, and how the lock-in effect is reshaping migration patterns in the United States.

We’ll also explore how inequality among millennials is widening—sometimes more dramatically than the gap between millennials and boomers—and examine the strategies homeowners are using to think about their mortgages not just as debt, but as financial instruments.

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The consumer balance sheet in the United States presents a bit of a mixed picture.

On the surface, debt service ratios are quite low, and spending is strong.

But when you dig a bit deeper, some signs of strain are starting to show.

Delinquencies in subprime auto loans have been rising steadily over the last three years, reaching a 15-year high this year.

As of January, 6.6% of subprime borrowers were at least 60 days past due.

This is the highest rate since Fitch began tracking the data in 1994.

Unsecured credit card delinquencies have been rising too, with the sharpest increases among cards issued between 2021 and 2023.

The financial pressure is concentrated among recent borrowers and lower-income households, whose balance sheets are more exposed to rate hikes and inflation.

On top of this, consumer spending has been distorted this year as consumers rushed out to buy durable goods before tariff price increases hit.

According to Morgan Stanley, a lot of the growth in consumer spending in the first quarter likely reflected hasty buying ahead of expected inflation, especially among higher-income households.

McKinsey’s survey found that 91% of consumers were aware that tariffs were coming, and many adjusted their spending habits—buying goods before price hikes hit store shelves.

One of the more interesting effects of the spike in mortgage rates, however, has been how they are influencing geographic mobility within the United States.

Homeowners with low-interest-rate mortgages are extremely reluctant to move, even for better job opportunities.

This behavior is reshaping migration patterns and contributing to regional imbalances in housing supply and demand.

The migration from northern states to the Sun Belt—which started long before the pandemic—has been disrupted by higher interest rates and the lock-in effect, leaving colder regions – in particular the North East with unusually tight inventories of homes available for sale.

Meanwhile, Florida and Texas – the states people rushed to during the pandemic - are seeing some of the steepest inventory increases in the country, with several metro areas showing year-over-year price declines.

While homeowners (as a group) have seen their balance sheets improve as rates have gone up, renters have absorbed the full brunt of housing inflation – and not just in the United States.

Across advanced economies, rents have been rising at their fastest sustained pace in decades—around 5% annually.

According to the Federal Reserve, median monthly rents in the United States jumped 10% in 2023 contributing to a surge in homelessness and widening the gap between renters and owners.

According to The Economist, in recent years American homeowners increased their spending on things like hobbies and eating out, by 25% in nominal terms, while renters increased their leisure spending by only 16%.

One of the biggest problems affecting affordability in the United States is that America’s housing market has been stuck in a supply shortfall for years.

US homebuilders added 1.4 million new homes in 2023, which was the highest number since 2007.

But that was not enough to serve the 1.8 million new households formed that year.

Builders in the United States have been struggling with rising material costs, labor shortages, and zoning restrictions that slow progress and inflate prices.

The new tariffs can be expected to push construction material prices even higher and anti-immigration policies will reduce the number of skilled construction workers in the country - as when we look at the different sectors of the US economy, the sector with the highest percentage of foreign-born workers is construction.

On the other hand, Trump has promised to open up tracts of federal land for housing construction and to speed up permitting.

In the wake of the Liberation Day celebrations in April - single-family home starts fell 12% compared to a year earlier.

This sudden drop was driven by Homebuilders nervousness over tariff volatility – as if they bought supplies when tariffs were high only to see them fall later – they would find themselves building homes with a higher cost basis than their competitors.

There has been a lot of talk in recent years about institutional purchases of homes and how that is pricing out new buyers.

According to The National Rental Home Council - large investors made 0.74 percent of single-family home purchases in 2021, meaning that someone other than a large investor purchased 99.26 percent of single-family homes.

According to data from Redfin - real estate investors have been cutting their purchases as higher interest rates ate into potential profits.

Despite the frequently cited negative effects of investor purchases of homes – research shows that large institutional investors typically buy homes in need of repair and upgrade them to rent them out.

The homes bought by investors are not left unoccupied, so while they reduce the number of owner-occupied homes in a neighborhood – they increase the supply of homes available to renters who might otherwise not be able to afford to live in predominantly owner-occupied neighborhoods.

Overall, the effects of investors on the housing market are mixed.

According to Redfin data - while large corporate buyers have pulled back from real estate investments, smaller firms and individual investors are still active buyers, particularly in the Southeast and Southwest.

They say that these investors have a preference for investing in low-priced homes and condos, with starter homes making up 40% of investor purchases.

One of the big trends in the housing market – which is frequently discussed - is the fact that one out of every three homes in the United States is owned by people over the age of 65.

The percentage of retiree homeowners had stayed flat for decades but began to surge starting in 2012.

This group are particularly concentrated as a percentage of homeowners in the Northeast where their tendency to age in place – rather than to move to retirement communities has grown over time.

This concentration of ownership among older generations has deepened the generational wealth divide.

But increasingly, the sharper fault line is within generations themselves.

As John Burn-Murdoch explained in the Financial Times, while the average millennial in the U.S. had 30% less wealth than the average boomer by the age of 35, the wealthiest 10% of millennials are now 20% richer than the wealthiest 10% of boomers were at the same age.

In the UK, the top decile of thirty-somethings holds £300,000 in property wealth, nearly triple that of the wealthiest boomers at the same age.

Much of this advantage is inherited: 36% of young American homeowners received family financial help to buy their first home, and among UK recipients, the top 10% received £170,000, compared to an average gift of £25,000.

These transfers compound over time.

A larger deposit not only lowers monthly payments but also reduces total interest paid—doubling the value of the original gift.

As Burn-Murdoch notes, “home ownership in the US is becoming increasingly hereditary, just as it is in Britain.”

The result is a growing divide between millennials with access to capital and those without—one that is increasingly visible, and increasingly bitter.

A home is often the largest investment a household will make, and the mortgage used to finance it becomes the most consequential financial product in their portfolio.

Fixed-rate mortgages resemble bonds: their value shifts when interest rates change, even though the repayment schedule remains constant.

Floating-rate mortgages behave more like corporate loans, adjusting in real time and maintaining a stable present value.

These structures influence the composition of a household’s broader financial portfolio.

As the Economist noted in a recent article - a homeowner with a fixed-rate mortgage worth 20% of their savings and a classic 60/40 stock-bond allocation is effectively holding a 60/20 portfolio—the mortgage offsets their bond exposure.

For first-time buyers with little savings, the leverage effect is even more pronounced.

Their portfolios resemble those of hedge funds: heavily leveraged, long equities, and structurally short fixed-income assets.

The decision to repay early, then, hinges on opportunity cost.

Historically, investing spare cash in equities has outperformed early repayment.

A $1,000 repayment in 2005 would have saved $1,800 in interest; the same amount invested in a global index fund yielded $6,500.

With interest rates elevated and equity valuations high, the balance between risk and return is shifting.

The Economist argues that households should think of their mortgage as an important part of their investment portfolio – rather than just thinking of their home as an investment.

In most parts of the world, 30-year fixed-rate mortgages are either extremely rare or entirely unavailable.

British and European borrowers can usually only fix their mortgage rate for two or five years, exposing them to frequent refinancing risk and rate shocks.

The expiration of ultra-low rates in Europe has already triggered a wave of rising mortgage bills.

In China, the structure is different again: homeownership surged through state-led reforms in the 1990s, but the Chinese real estate market is now burdened by debt distress, unfinished developments, and falling prices.

The Chinese model concentrated household wealth in real estate, often bought with massive leverage, and this is now undergoing a painful unwinding.

These contrasts reveal how deeply mortgage design influences broader financial behavior, wealth distribution, and economic resilience.

America’s long-term fixed-rate mortgage offers stability—but also creates lock-in effects when interest rates rise and can amplify inequality based on when a homeowner financed their purchase.

State-led housing booms can accelerate wealth accumulation to begin with, but also concentrate risk.

The design of mortgage systems – to a certain extent - reflects national priorities—and determines how households build, preserve, or lose wealth.

Market chatter around Federal Reserve rate cuts has intensified, but the structure of the U.S. mortgage market limits how much relief home buyers can expect.

Most 30-year mortgage rates are tied to long-term Treasury yields, which respond to inflation expectations and investor sentiment—not directly to short-term Fed moves.

Even as the Fed signals caution, mortgage rates remain near 6.75%, and Redfin economists expect them to stay in that range through year-end.

Meanwhile, the housing market is shifting.

There are now roughly half a million more sellers than buyers, and pending sales are down, but prices have not meaningfully declined.

Sellers are adjusting slowly, with asking prices rising 2.2% year-over-year, the smallest increase in nearly two years – but still an increase.

Buyers appear to hold more leverage, and many remain hesitant, backing out of deals or waiting for deeper price cuts that may not materialize.

This imbalance reflects deeper structural forces.

Inflation remains sticky, especially in the U.S., where fiscal expansion and tariff policies continue to push up costs.

Mortgage-backed securities—most of which are government-guaranteed—anchor the system, but also tie it to broader macroeconomic risks.

The result is a housing market caught between policy expectations and financial reality.

For future buyers, the promise of lower rates may not translate into affordability.

For policymakers, the challenge lies in aligning monetary tools with the realities of housing finance.

If you found this video interesting, you should watch my video on Americas Shopping Addiction next.

Don’t forget to check out our sponsor DeleteMe using the link in the description.

Have a great day and talk to you in the next video. Bye!