Why Are Americans Still Spending Despite Housing Costs?

Despite record household debt, the highest mortgage rates in decades, and consumer sentiment surveys that rival the darkest days of the 2008 financial crisis, Americans are still spending. Home Depot just posted a 5% rise in net sales. Walmart raised its full-year guidance. American Express noted on an earnings call that cardholders say they have no confidence in the economy — but keep swiping anyway. So why are Americans still spending despite high mortgage rates and a housing affordability crisis? The answer lies in a surprisingly deep divide between those who own homes with cheap locked-in mortgages and everyone else.

Why Are Americans Still Spending Despite High Costs?

The short answer is that not all Americans are equally squeezed. A significant portion of the population — particularly long-term homeowners — are actually in a stronger financial position than ever, and they're driving much of the consumer spending keeping the economy afloat.

Consider the math: 65% of Americans own their homes, and 40% of those homeowners own their properties outright with no mortgage at all. They don't care what the Fed does with interest rates. Another large group refinanced during the historic low-rate window of 2020 and 2021, and those people are now sitting on 30-year fixed mortgages at 2.5% to 3.5%, spending less than 9% of their income on housing. Meanwhile, the S&P 500 has surged, asset prices are elevated, and unemployment remains near historic lows. For this cohort, life is good — and they're spending accordingly.

The strain is concentrated elsewhere: recent homebuyers, renters, subprime borrowers, and younger households whose balance sheets were most exposed to the rate shock. Subprime auto loan delinquencies have hit a 30-year high. Credit card delinquencies are rising sharply, particularly on cards issued between 2021 and 2023. But this group isn't large enough to drag down overall spending figures — at least not yet.

How Much Have Mortgage Rates Increased Since 2020?

The scale of the rate shift is genuinely staggering. Mortgage rates in the United States went from around 3% in 2020 and 2021 to over 7% in 2023 and 2024 — more than doubling in roughly two years. That's not just a statistic. On a $400,000 loan, that jump takes your monthly payment from $1,686 to $2,661. That's nearly $1,000 more every single month, every year, for 30 years.

But the pain doesn't stop there. Buyers entering the market today aren't just facing higher rates — they're financing homes that cost roughly $90,000 more on average than they did five years ago. So you're paying more money, borrowed at more than twice the interest rate, in a market where wages haven't kept pace. Those who bought in the last three years are now spending roughly a quarter of their income on their mortgage payment alone.

This has created what analysts are calling a dual housing economy — not just the classic divide between renters and owners, but a sharper fault line between those with cheap legacy mortgages and those who bought recently at elevated prices and rates.

What Is the Mortgage Lock-In Effect?

Here's where things get structurally interesting. According to Redfin, Americans are staying in their homes far longer than historical norms — and a big reason is purely financial. If you locked in a 3% mortgage in 2021 and you sell your home today to buy something comparable, you'll be trading that cheap loan for one at nearly 7%. Your monthly payment could jump by hundreds or even thousands of dollars for the same quality of home. It simply makes no financial sense to move.

This lock-in effect is reshaping migration patterns across the country. The pandemic-era migration boom — people fleeing the Northeast and Midwest for Florida and Texas — has slowed dramatically. Northern states now have unusually tight housing inventories because existing owners won't sell. Meanwhile, Sun Belt markets like Florida and Texas, which saw enormous demand surges in 2021 and 2022, are now experiencing rising inventory and, in some metro areas, actual year-over-year price declines.

The lock-in effect is also subtly distorting the labor market. Homeowners who might otherwise relocate for better job opportunities are passing on those moves because the financial penalty of giving up a low-rate mortgage is simply too high. One real estate agent described buyers today as "stretching to afford payments, banking on future rate cuts to refinance — the financial equivalent of buying a yacht and hoping the marina fees go down."

Are Millennials Worse Off Than Boomers on Housing?

The generational wealth divide is real, but the more revealing story is the divide within generations. Yes, the average millennial in the United States had about 30% less wealth than the average boomer at age 35. But the wealthiest 10% of millennials are now 20% richer than the wealthiest 10% of boomers were at the same age.

Much of this upper-tier millennial wealth is inherited or family-assisted. Roughly 36% of young American homeowners received family financial help to buy their first home. In the UK, the top 10% of recipients received £170,000 in family gifts compared to an average of just £25,000 — a gap that compounds powerfully over time, since a larger deposit means lower monthly payments and dramatically less interest paid over the life of the loan.

As the Financial Times' John Burn-Murdoch has noted, homeownership in the US is becoming increasingly hereditary. The divide between millennials with access to family capital and those without is widening — and it's increasingly visible in net worth data, neighborhood demographics, and even consumer spending habits.

Why Aren't Home Prices Falling Despite High Rates?

This is the question that's baffling buyers who are waiting on the sidelines. Logically, higher rates should cool demand and push prices down. And demand has cooled — pending sales are down, there are roughly half a million more sellers than buyers in the current market, and asking price growth has slowed to 2.2% year-over-year, the smallest increase in nearly two years.

But prices haven't meaningfully declined because supply remains structurally constrained. The US added 1.44 million new homes in 2023 — the most since 2007 — but that same year saw 1.8 million new households formed. Builders are fighting rising material costs, labor shortages, and zoning restrictions that slow everything down. New tariffs are expected to push construction costs even higher, and immigration restrictions will shrink the construction workforce at exactly the wrong time. In the wake of Liberation Day tariff announcements in April, single-family home starts fell 12% year-over-year as builders paused, uncertain whether materials purchased at high tariff prices would put them at a competitive disadvantage later.

The result is a market stuck in limbo: sellers won't drop prices significantly, buyers won't pay the current asking prices, and both sides are waiting for the other to blink first.

Are Investors Really Driving Up Home Prices?

Institutional investors buying up single-family homes gets a lot of attention in the media — but the data suggests the narrative is somewhat overblown. According to the National Rental Home Council, large investors accounted for just 0.74% of single-family home purchases in 2021. That means individual buyers purchased over 99% of single-family homes sold that year.

The research also shows that large institutional investors typically buy homes in need of repair, renovate them, and rent them out. These homes aren't being left empty — they're adding to the rental supply in predominantly owner-occupied neighborhoods. The effects on overall housing affordability are genuinely mixed. Smaller investors and individual landlords, however, remain active buyers particularly in the Southeast and Southwest, with a strong preference for starter homes and condos.

Should You Pay Off Your Mortgage Early or Invest?

This is where thinking about your mortgage as a financial instrument — not just as debt — becomes genuinely useful. A fixed-rate mortgage functions like a bond in your investment portfolio. If you hold a fixed-rate mortgage worth 20% of your net worth alongside a classic 60/40 stock-bond allocation, you're effectively running a 60/20 portfolio because the mortgage offsets your bond exposure.

The historical case for investing over early repayment is compelling. A $1,000 early mortgage payment made in 2005 would have saved approximately $1,800 in interest over the life of the loan. The same $1,000 invested in a global index fund would have grown to $6,500. But with interest rates elevated and equity valuations historically high, that calculus is shifting. The opportunity cost of not paying down a 7% mortgage is lower than it was when rates were at 3%.

How Does the US Mortgage System Compare Globally?

The 30-year fixed-rate mortgage is essentially an American invention — and a genuinely unusual one by global standards. In the UK and across much of Europe, borrowers can typically only fix their rate for two to five years before facing refinancing risk. The expiration of ultra-low rates in Europe has already triggered a painful wave of payment increases for millions of households.

In China, the dynamic is different again. State-led housing reforms in the 1990s created an extraordinary surge in homeownership, but the market is now burdened by debt distress, unfinished developments, and falling prices. Chinese households concentrated their wealth in real estate bought with massive leverage — and that bet is now unwinding painfully.

America's 30-year fixed-rate system offers real stability and insulates borrowers from rate volatility. But it also creates the lock-in effects we see today, amplifies wealth inequality based on the timing of purchase, and makes the housing market remarkably sticky in both directions. The design of a country's mortgage system, it turns out, says a great deal about its national priorities — and determines, more than most people realize, how households build or lose wealth across generations.