Fixed-Rate Mortgages Are Rent Control for Homeoweners
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Fixed-Rate Mortgages Are Rent Control for Homeoweners
Mike Fellman<br>Jun 27, 2026
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Mayor Zohran Mamdani has fulfilled his central campaign promise of freezing the rent for tenants in the nearly 1 million units under the city’s rent stabilization ordinance. This has drawn the ire of many policy wonks in the housing space regarding the follies of rent control. Ironically however, fixed-rate mortgages, which have similar warping effects on housing market, are basically an accepted part of American life and draw little scrutiny. In reality, fixed-rate mortgages, via lock-in effects, misallocate housing the same way rent control does and cause the same kinds of welfare loss.
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Basic Rent Control Economics<br>Rent control misallocates housing via lock-in effects. Not only do landlords lose out on higher profits, but occupants cannot maximize the utility of said housing. An apartment next door to a hospital may be highly valued by a doctor but much less valued by random person who works on the other side of town. Allowing the doctor to outbid other prospective tenants not only raises the landlord’s profits, but it actually puts the apartment to its “best use” as expressed via the doctor’s high willingness to pay. Similar arguments can be made with respect to unit size. For example, a family of 5 would probably be willing to pay significantly more for a three-bedroom apartment than a single person would. By allowing open bidding on housing to occur, the market naturally sorts housing into its “best use” via the price system.<br>Rent control ends this market-based sorting and reduces both landlord profits an aggregate consumer welfare. However, it comes at the benefit of stabilizing housing costs for tenants in rent stabilized units. Economics as a discipline cannot determine whether this tradeoff is worth it. It is largely a political question. Economics can only measure the aggregate welfare lost from rent control and the level of de facto redistribution that rent control enacts.<br>Fixed-Rate Mortgages<br>The dominance of fixed-rate mortgages is unique to the United States and only made possible via government subsidies and guarantees. Just like rent control, it leads to a misallocation of housing. Homebuyers who are lucky enough to buy when rates are low get to lock-in their borrowing costs for up to 30 years. When interest rates rise, moving means getting a new loan at a higher rate, which can significantly increase housing costs. However, the circumstances of households frequently change such that a move may be optimal but for higher borrower costs. For example, a change in job, or an increase in family size may motivate a move. But since many households have locked-in mortgage rates well below current mortgage rates, many choose to just stay put. This distorts the housing market at the expense of new entrants, who have fewer potential options to choose from when they go looking to buy. It also reduces mobility by widening bid-ask spreads. An existing homeowner with a locked-in low rate mortgage will have a much higher reserve price to sell their home. But since a new buyer faces higher borrowing costs, their ability to pay these high prices is greatly reduced. This depresses home sales and causes households to stay put longer.<br>This reduced mobility also distorts the labor market. There is evidence that households with low, fixed-rate mortgages decline to move even when presented with better employment opportunities because they do not want to lose their low rate mortgage loan. Similar employment effects have been documented with rent control. Since moving means losing a coveted low rent apartment, tenants in stabilized units significantly narrow their job searches and are thus more likely to remain unemployed for longer.<br>The Politics of Housing Stability<br>Both rent control and fixed-rate mortgages distort the housing market. About half of the 50 million fixed-rate mortgages in the United States are below 4 percent, a steep discount compared to the going rate of about 6.5 percent. At the same time there are about 2.5 million rent stabilized units in the entire country. With roughly ten times more households with “locked-in” mortgages than there are households in rent stabilized units, there can be no doubt about which policy is more distortionary. However, relatively little outrage is directed at US mortgage policy which makes fixed-rate loans possible in the first place. The reason for this is politics. Homeowners are a powerful political constituency and households highly value the ability to lock-in their housing costs.<br>As a society through our elected representatives, we have decided that greatly warping the for-sale housing market (and the labor market) is a price...