Mortgage Rate ‘Lock-In’ Effect Keeping Sellers Back, Report Says

Analysis from the Federal Housing Finance Agency finds that, while U.S. mortgage rates are not historically high, the gap between the rates existing homeowners are paying and would-be home buyers are facing has reached a point not seen in decades.

The result is a “lock-in effect” that’s keeping the housing supply extremely tight, a problem that President Joe Biden’s proposed subsidies are unlikely to fix.

The findings are in a March 2024 working paper entitled “The Lock-In Effect of Rising Mortgage Rates” by Ross M. Batzer, Jonah R. Coste, William M. Doerner, and Michael J. Seiler.

“People can be ‘locked-in’ or constrained in their ability to make appropriate financial changes,” the authors write, pointing to obstacles like “being unable to move homes, change jobs [or] sell stocks.” These problems are “often overlooked” by housing market analysts.

Another force adding to the lock-in effect: “An environment of rising mortgage rates.”

“In the U.S., 96% of borrowers have a fixed rate mortgage, and 63% of those borrowers have a fixed rate below 4%. Given that current rates remain close to 7%, many in-place borrowers simply cannot afford to sell their home because they would be giving up roughly $500 a month in lower mortgage payments worth over $60,000 in present value,” according to the working paper.

The value of all active fixed-rate mortgages is nearly $3 trillion.

The authors blame the lock-in effect for the fact that around 1.3 million fewer homes were sold from the spring of 2022—when mortgage interest rates began rising—to the end of 2023. Given that total annual home sales are usually around five million, that is a huge number.

Another way to view the data in this report: From 1998 to 2020, the number of mortgage holders who had locked-in rates more than one point below the market was just 40%. By the end of 2023, according to the working paper, about 70% of mortgage holders had loans with interest rates three points below current market rates.

And, they added, “Absent a dramatic decrease in rates, it looks like lock-in could be with us for a long time.”

Housing market analysts agree.

In a March 5, 2024 note, Capital Economics’ property economist Thomas Ryan wrote, “Even if mortgage rates fall to 6% as we expect, mortgage rate ‘lock in’ will continue to curb home moves. As a result, we only anticipate a trickle of new resale supply coming onto the market over the next few years.”

Indeed, National Association of Realtors chief economist Lawrence Yun was already warning last September that the gap between the rate owners are paying vs. the rate they would pay as buyers made it “possible that mortgage rates may go up to 8%.”

The Biden administration acknowledges the problem. When the president’s State of the Union proposal to give some homebuyers a $400 per month mortgage subsidy hit the obvious headwinds — increasing demand during restricted supply leads to higher prices — the White House pivoted.

“For homeowners looking for a new place but worried about giving up their lower mortgage rate, I’m proposing a $10,000 tax credit if they sell their starter homes,” Biden announced.

According to an analysis at National Review, “the closing costs associated with selling and then buying a home (broker commissions, inspection and appraisal fees, loan-origination fees, etc.) would easily take up most if not all of that $10,000. But more importantly, increased housing payments would quickly exceed $10,000, and after that credit expires after the first year, the new homeowner would be drastically worse off.”

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