High mortgage rates keeping Americans from new jobs, straining labor market

Homeowners with historically low mortgage rates are increasingly avoiding new, better-paying jobs that would require them to move, a development that is pressuring already elevated housing prices and limiting domestic labor mobility.

With home prices now surging to all-time highs and mortgage rates still hovering around 7%, a reluctance to move is surfacing in US labor market data. Less than 3.5 million workers voluntarily quit their jobs in May, down 13.7% from a year ago and well below the peak of 4.5 million quits in April 2022, according to data from the US Bureau of Labor Statistics. Hiring has also slowed, falling nearly 7% from a year earlier.

The trend threatens to hinder US productivity as Americans remain in lower-paying positions below their experience level rather than move to a better job that would cause them to take on a mortgage that would substantially increase their housing costs. Potentially millions of Americans now have these "mortgage handcuffs" — home loans with rates well below current levels — that they see as a chief impediment to a move for a new job or any other reason, said Thomas Simons, a senior economist at Jefferies. The factors point to the potential languishing of US labor mobility, the ability for workers to move from one job to another and a key component of a healthy jobs market.

"Given the hurdles, it is hard to see why someone would be motivated to move just for work," Simons said.

Locked-in rates

When the Federal Reserve cut its benchmark federal funds rate to near zero as part of its 2020 pandemic policy response, mortgage rates soon tumbled. The 30-year fixed rate mortgage average in the US fell below 2.7% in December 2020, a historic low that triggered a wave of new home purchases and refinancings.

As the Fed began hiking rates in March 2022, mortgage rates have followed, climbing to 7.8% in October 2023, its highest level since 2000. The 30-year rate is now about 6.9%, but most homeowners are locked in at rates well below that.

Nearly 60% of US homeowners in the third quarter of 2023 had a mortgage rate below 4% and nearly one-quarter had a rate below 3%, near the highest share on record, according to the latest analysis by real estate brokerage Redfin.

This has led to widespread inertia throughout the housing market as homeowners are unwilling to take on another mortgage. Even if a job offer in another city or state includes a considerable wage increase, it may not be enough to cover the higher housing costs that would come with a new, higher mortgage, economists said.

"There is strong evidence that high mortgage rates are preventing potential workers from moving to areas where jobs are available," said Augustine Faucher, chief economist of The PNC Financial Services Group. "The lock-in effect may be preventing some workers from taking jobs that would pay more in other areas, because even with the higher pay it isn't worthwhile."

When Nana Safoah Thompson got an offer for a new clinical research job in Texas, it meant that she and her husband, Nigel, a product manager who works remotely, would need to move from Arizona where they owned a home with 2.9% mortgage rate. In October, they closed on a house near Dallas for just under $354,000 with a 30-year fixed rate mortgage at just over 6.1%. The new mortgage has increased their monthly mortgage payment by about $1,500, they said.

Rather than give up their sub-3% rate in Arizona, the couple held on to the property and are now renting it out.

For many Americans, however, that is not an option.

Moving declines

"It's clear that declining mobility is good for some and less good for others," said Julia Pollak, chief economist at ZipRecruiter. "If you're locked into a low mortgage rate and in a job that you otherwise would have switched by now but like well enough to stay in for longer, then you're clearly better off. But if you're trying to get a home or get a job, lower rates turnover in both markets mean fewer opportunities for you."

Domestic household moves, which peaked at 12.9 million in 2021 have steadily fallen as rates have risen, dropping nearly 25% to 9.7 million in 2023, according to estimates from John Burns Research and Consulting.

"We have seen migration flows cool down and revert back pre-pandemic trends as employers have called workers back into the office and homebuying has become less affordable," said Jackie Benson, an economist with Wells Fargo.

The share of US homebuyers looking to move to a different metro area fell below 24% in late 2023, down from a record high of 26% in the summer of 2023, according to Redfin.

A June paper that studied the impact of mortgage rates on labor mobility found that a 1-percentage-point change in the difference between the mortgage rate a homeowner was locked into and current rates reduced moving to a new location by 9% between 2010 and 2024 and 16% between 2022 and 2024. Moving fell as the Fed raised its benchmark interest rate from near zero to over 5% as part of its effort to combat soaring inflation through higher rates.

The paper, which analyzed individual credit data, found that homeowners locked into relatively low mortgage rates also reduce the likelihood of American workers starting businesses and may have compelled workers to not seek employment with higher wages within a distance of 50 to 150 miles of their home.

"It's not that healthy for the labor market to have workers unable or unwilling to move," Julia Fonseca, an assistant finance professor at the University of Illinois and a co-author of the report, said in an interview. "Mobility is important so that businesses can find the right workers for the jobs that they have open. This could potentially affect overall economic activity if it's severe enough."

Looking at job market data, if quits continue to slow with hiring, worker productivity could also soon take a hit, said Abhinav Gupta, an assistant professor of finance at the University of North Carolina.

"Usually, we think that more labor mobility is good for the economy, as it allows workers to reallocate to jobs where they can be most productive," Gupta said.

Labor mobility is a "critical element" of a healthy jobs market as workers tend to move to jobs that pay more, offer additional benefits and better fit their skillset, said Aaron Terrazas, chief economist with Glassdoor.

"When labor mobility is reduced — stuck in a low-level equilibrium, like it seems to be at the current moment — people remain in jobs that don't fully match their skills or aspirations," Terrazas said.