Higher mortgage rates now force people to buy smaller homes

When interest rates go up, people buy fewer houses. This happens because loan payments are fixed in dollars. Even if the real cost of borrowing goes down, higher nominal rates mean higher monthly payments. This makes it harder for people to afford homes, especially in cities where incomes haven't kept pace with housing costs.

This paper shows that the way loans are structured matters more than we thought. Fixed nominal payments on mortgages mean that when interest rates rise, people can borrow less. This isn't just about the real cost of money. It means that central bank decisions about interest rates have a direct, measurable impact on who can buy a home and how much they can afford. This amplifies the effect of rate hikes on the economy.