How Rate Volatility Broke America's Housing Finance System
A $2 trillion problem hidden in plain sight
Today’s Thesis Driven is a guest letter by Raunaq Singh, founder and CEO of Roam, which helps connect buyers, sellers, and agents to homes with assumable mortgages.
Interest rates shooting up from 2.8% to over 7% between 2022 and 2025 was a stress test that exposed a fundamental design flaw in American housing finance. The 30-year fixed-rate mortgage, once the cornerstone of middle-class wealth building, has become a mobility trap.
While we hear a lot about the housing affordability crisis, this mobility trap is a systemic failure of the nation’s financial infrastructure. A homeowner with a 2.8% mortgage faces a $48,000 penalty just to reset their loan at current rates. Between Q2 2022 and Q2 2024, this rate lock-in prevented 1.72 million expected home sales from happening.
Today’s letter will explore this crisis and and possible solutions, including:
Macroeconomic impact of rate volatility on the housing market;
Winners and losers of the current framework;
Lessons from international models;
Solutions including assumable and portable mortgages.
The Mechanics of Market Paralysis
The numbers tell a stark story: A $500,000 mortgage at 2.8% costs $1,850 monthly. At 7%, that same mortgage costs $3,327, an $18,000 annual penalty for moving. When 73% of existing mortgages carry rates below 5% and 54% are under 4%, you get systematic gridlock. Over 80% of sellers feel locked in by their low rate.
Take the software engineer in Columbus with a 3% mortgage who receives a job offer in Austin. The promotion comes with a 20% salary increase, but moving would add $1,500 to their monthly housing costs. They decline. Scale this scenario across millions of households, and you see why the Wall Street Journal just ran the headline: “Nobody’s Buying Homes, Nobody’s Switching Jobs—and America’s Mobility Is Stalling.”
The real-world impact is measurable and accelerating. Housing transactions declined 19% from 2022 to 2023. Existing home sales fell 0.7% year-over-year in May 2025, marking the slowest May in 16 years. New home sales declined 6.3% year-over-year in the same period. The housing market's dysfunction is now dragging broader economic growth, with GDP forecasts revised downward to 1.7% for 2025, partly due to housing sector weakness.
The paradox gets worse: listings are up 29% year-over-year and houses are sitting on the market for a median 53 days, with nearly 500,000 more sellers than buyers. Yet many major markets, especially in the Northeast, still face inventory shortages of up to 46%.
How 1930s Infrastructure Collides with 2020s Reality
The 30-year fixed mortgage emerged from Depression-era policy designed to create stability through predictable payments. The Federal Housing Administration (1934) and Fannie Mae (1938) helped standardize long-term, fixed-rate loans and expand access to homeownership. Mortgage-backed securities, which later tied housing finance more directly to Treasury yields, didn’t arrive until 1968. The seeds of today’s system were planted in that earlier era.
For decades, the model expanded access to credit and helped democratize homeownership, fueling the rise of the American middle class. But the system was never immune to volatility: the early 1980s saw even sharper jumps, when mortgage rates doubled in less than two years. But because home prices then were much lower relative to incomes, and the market less financialized, the impact on household mobility was less severe. By contrast, in today’s high-cost, low-affordability environment, a 300-basis-point swing can paralyze the market.
We've inadvertently tied the most important purchase in Americans' lives to bond market volatility, turning every homeowner into an unwitting interest rate speculator.
The design flaw creates problems in both directions. During low-yield environments, sudden drops can inflate bubbles, as seen in the 2000s, leading to over-mobility and subsequent crashes. Conversely, rapid rate increases create the lock-in effects we're witnessing today.
The fundamental mismatch is structural: housing finance was designed around the assumption of rate stability that no longer exists. Climate volatility drives fiscal uncertainty. Geopolitical tensions create monetary swings. Supply chain disruptions fuel inflation volatility. The 30-year fixed mortgage assumes a world that disappeared decades ago.
Commercial real estate adapted decades ago with bridge financing and flexible terms. Equipment leasing offers transferable features. Even auto loans have portability options. Only residential mortgages, the foundation of household wealth, remain frozen in the 1930s.
International Models: Flexibility by Design
Other countries, like Denmark and Canada, avoided this trap through structural design choices that distribute rate risk more evenly.
Denmark's Covered Bond System
Danish mortgages are funded by covered bonds directly linked to each borrower's loan. When rates rise and bonds lose value, homeowners can buy back their bonds at market prices and retire their mortgages at a discount.
The mechanics are elegantly simple: when a Danish homeowner wants to prepay their mortgage, they can either pay the outstanding principal or purchase the underlying bonds on the open market. If interest rates have risen since origination, those bonds trade at a discount, allowing borrowers to retire their debt for less than face value. Conversely, if rates have fallen, borrowers pay a premium, but they can simply refinance instead.
This creates natural market equilibrium. During the 2022-2023 rate shock, Danish homeowners with older, low-rate mortgages could move properties while maintaining their favorable financing terms. The system automatically adjusts to rate volatility without creating the artificial lock-in effects plaguing American markets. Daily bond pricing creates transparency and reduces shopping friction compared to the opaque American system.
Canada's Rolling Reset Structure
Canadians use 5-year fixed mortgages that automatically reset at prevailing rates. While this creates rate risk, it prevents long-term lock-in. The rolling structure ensures regular market re-entry points, maintaining transaction liquidity even during volatile periods.
The Canadian approach forces rate discovery every five years, preventing the accumulation of massive rate differentials that paralyze markets. A typical Canadian mortgage amortizes over 25 years but reprices every five years, creating predictable reset points that both borrowers and lenders can plan around.
During periods of rate volatility, this system maintains housing market fluidity because no homeowner holds a rate significantly different from current market conditions for more than five years. While Canadians face rate risk at renewal, they avoid the mobility penalties that trap American homeowners. The trade-off proves beneficial: Canadian housing markets maintained higher transaction volumes during recent rate increases, with household mobility remaining closer to historical norms.
Both systems prove you can have stability without sacrificing adaptability, which is exactly what the current U.S. system lacks.
The Assumable Mortgage Underground
Within the broken system, 12.5 million assumable mortgages (FHA, VA, USDA loans) offer a glimpse of what's possible. A buyer can take over the seller's rate directly, with no refinancing required. Of these, 6.8 million carry rates below 4%, with 4.8 million at 3.5% or less.
The market is responding: assumption transactions jumped 127% 2021 to 2024, from 2,549 to 5,861. Assumable properties sell 5% above comparable homes and close three weeks faster. But friction remains enormous:
Servicers earn more from new originations, creating misaligned incentives
Manual processing takes 45 days versus weeks for new loans
Buyers need substantial down payments to bridge equity gaps
The economics reveal the system's potential. A typical assumption saves borrowers nearly $100,000 in present value terms compared to market rates. Yet this value gets largely captured by sellers through higher sale prices, demonstrating how rate lock-in creates wealth transfers rather than wealth creation.
Geographic analysis shows assumption activity concentrates in markets with favorable conditions: lower rental costs that reduce buyer alternatives, higher working-age populations that increase mobility demand, and seller-favorable market dynamics that enable premium pricing.
Companies like Roam (disclaimer: I'm the founder) are building technology to reduce these frictions. But assumables remain a band-aid on a structural wound that requires systematic reform.
Mortgage Portability: The Systematic Solution
True mortgage portability, transferring your rate to a new property, represents the clearest path forward, but implementing it requires rebuilding core infrastructure that has remained unchanged since the New Deal era. The technical architecture needed is straightforward: standardized loan data formats that enable secure transfers between properties, automated property valuation and risk assessment systems that can operate at the speed of modern markets, and digital verification protocols that reduce manual underwriting from weeks to days.
The harder challenge lies in restructuring market dynamics that have calcified around the current system. This means developing mortgage-backed securities specifically designed to accommodate mobile loans without sacrificing investor protections or regulatory compliance. It requires new regulatory frameworks that support inter-property transfers while maintaining appropriate oversight of systemic risk. Most critically, it demands realigning servicer incentives away from origination volume toward facilitating customer mobility, a shift that challenges decades of established business models.
Denmark proves this works at scale through their callable bond structure that makes portability routine rather than exceptional. Their system demonstrates that mortgage flexibility doesn't require sacrificing market stability or investor confidence. The Danish model succeeds because it aligns incentives across all participants: borrowers gain mobility, lenders maintain profitable relationships, and investors receive transparent, liquid securities.
The data from assumable mortgage markets reveals that mobility benefits compound across regions in measurable ways. Counties with assumption financing availability above the median experience significantly less housing supply reduction and household mobility decline during rate increases. The effect follows clear thresholds: areas with 25-35% assumable mortgage market share can limit housing listing declines to under 5% even with 2% rate increases, while markets below 15% market share see drops exceeding 20%. This suggests that systematic portability implementation could transform regional economic dynamics by maintaining labor market fluidity during periods of monetary volatility.
Economic Stakes and Strategic Implications
The macroeconomic costs compound daily. Beyond the 1-2% productivity drag from reduced labor mobility, we're witnessing:
Capital misallocation: $2 trillion in home equity trapped by rate differentials
Regional inequality: High-opportunity metros becoming inaccessible while workers remain stuck in declining areas
Generational exclusion: Median home prices hit $416,900 (up 27% in five years) while existing owners hoard low-rate properties
The feedback loops are vicious. Reduced mobility constrains labor markets, which dampens productivity, which slows wage growth, which reduces affordability. We're creating the first generation for whom homeownership, the traditional path to middle-class stability, is systematically out of reach.
Research demonstrates that increasing assumable mortgage market share to 35-45% could substantially mitigate these effects. The analysis shows clear thresholds: counties where assumable mortgages represent less than 15% of the market experience housing listing drops exceeding 20% with 2% rate increases. Those with 25-35% market share limit declines to under 5%.
With mortgage rates expected to remain above 6% through 2025, declining only slightly to around 6% by year-end, these dynamics will persist well into the future. The lock-in effect that has already prevented 1.72 million home sales will continue constraining economic growth and mobility.
The Path Forward
Solutions exist, but they require coordinated action across multiple stakeholders, each playing a critical role in rebuilding America's housing finance infrastructure for the modern economy.
Policymakers hold the most immediate levers for change. The government-sponsored enterprises need authorization to pilot portable mortgage products that can demonstrate viability at scale. This means enabling GSE pilots for portable mortgage products while standardizing data requirements across mortgage servicers to create the technical foundation for seamless transfers. Regulators must realign servicer compensation structures away from origination volume toward facilitating mobility. The evidence suggests targeting assumable mortgage market share of 25-35% represents the threshold needed to achieve meaningful lock-in mitigation across regional markets.
Financial institutions face the challenge of redesigning market structures while maintaining profitability. Banks and mortgage companies must develop mortgage-backed securities structures that can accommodate loan portability without sacrificing investor confidence or regulatory compliance. This requires substantial investment in automated underwriting systems capable of property-to-property risk assessment and the creation of bridge products that smooth transitions between properties. Portable mortgages should attract broader borrower pools than traditional fixed-rate products, creating deeper, more liquid markets that benefit all participants through improved pricing and reduced risk.
Technology companies represent the enabling infrastructure layer that can make systematic change feasible. The industry needs companies building connective infrastructure for seamless loan transfers, similar to how payment processors revolutionized financial transactions. This means developing AI-driven risk assessment tools specifically designed for portable mortgages and creating consumer interfaces that transform complex transitions into simple, digital experiences. The technical challenges are significant but not insurmountable, standardized loan data formats and digital verification systems already exist in adjacent industries.
The mortgage industry generates billions from current dysfunction, where every refinancing creates fees and every rate reset triggers new origination profits. But the societal costs now outweigh industry benefits. When teachers can't relocate to understaffed schools and engineers can't move to innovation hubs because of mortgage rate lock-in, the entire economy suffers productivity losses that dwarf industry profits. The alignment challenge is real but solvable through regulatory frameworks that create sustainable business models around mobility rather than transaction volume.
Beyond Crisis Management
This isn't about returning to a mythical past of stable rates. Climate volatility, fiscal pressures, and geopolitical uncertainty ensure continued rate swings. The question is whether we'll build housing finance infrastructure resilient enough to handle that volatility.
Rate volatility is here to stay, and with it, the need for adaptive financial structures. The current system's flaw isn't just the lock-in effect during rate rises, but also the boom-bust cycle that creates over-mobility during rate drops, followed by paralysis during rate increases. Both extremes destabilize markets and misallocate resources.
The 30-year fixed mortgage served its historical purpose brilliantly. But financial products must evolve with their environments. Clinging to Depression-era solutions in an age of algorithmic trading and instant global capital flows is nostalgia, not policy.
Other asset classes adapted. Commercial real estate learned flexibility. Public markets created hedging instruments. Only residential mortgages, which affect more Americans than any other financial product, remain stuck.
Rate volatility exposed what housing economists have known for decades: our system works in calm weather but fails catastrophically under stress. With mortgage rates likely staying above 6% through 2025 and beyond, we can't wait for calm seas that won't return.
The tools exist. International models prove alternatives work. Technology can enable solutions at scale. What's missing is the recognition that incremental fixes won't suffice. We need infrastructure reform that prioritizes human mobility over institutional inertia.
Housing finance should serve homeowners, not trap them. It's time to build a system that works for how Americans actually live, rather than forcing families to organize their lives around the arbitrary lock-in created by yesterday's interest rates.
—Raunaq Singh
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