Housing market lock-in effect is real, as shown on this map.
Housing market lock-in effect is real, as shown on this map.
The Lock-in Effect: Why Homeowners are Reluctant to Sell
The housing market has seen a drastic decline in the number of homes available for sale across the country. Homeowners are hesitant to sell their properties and purchase new ones due to the financial shock that would come with losing their historically low mortgage rates for something with a 6% or 7% interest rate.
Sean Dobson, the founder and CEO of property powerhouse Amherst, summed up this frustration perfectly when he recently tweeted, “Financing these homes at 3% mortgage rates, then jumping rates to 6% is the same as burning them down from a supply perspective.” Dobson’s sentiment resonates with homeowners who fear losing their advantageous mortgage rates.
The so-called “lock-in effect” is not limited to specific regions. Cities like Richmond, Va., and Philadelphia have seen a decline of 27% and 26% respectively in new listings on a year-over-year basis. Even Austin, a market undergoing home price correction, suffered a significant 31% decrease in new listings on realtor.com between June 2022 and June 2023.
According to Realtor.com, there were 26% fewer U.S. homes listed for sale in June 2023 than in June 2022, and a staggering 28.9% fewer than in June 2019. These statistics highlight the scarcity of inventory in the market.
To better understand the lock-in effect, it’s essential to consider the prevailing interest rates. The majority of mortgage borrowers, around 91%, have an interest rate below 5%. Additionally, 70.7% enjoy an interest rate below 4%. With such low rates, it doesn’t make much sense for homeowners to sell and purchase a property at a higher mortgage rate of 6% or 7%.
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The limited inventory available in the market has intensified competition among buyers, leading to a surge in home prices during the first half of the year. This upward trend has been observed in most markets, particularly in the Northeast and Midwest regions, where home price gains exceeded expectations this spring.
However, there are exceptions to this trend. Take a closer look at Austin’s housing market, for instance. Despite a considerable 31% decrease in new listings, home prices in Austin are still down 13% from their peak, according to Black Knight. The intriguing aspect lies in the overall increase in active listings by 47% year-over-year. While new listings decreased, the amount of supply sitting on the market has grown significantly. This trend has resulted in homes staying on the market for longer periods. Instead of a rush of sellers, Austin is experiencing a pileup effect that is pushing prices lower compared to other markets that are showing price increases.
In conclusion, the lock-in effect has caused homeowners to hesitate to sell their properties and buy new ones due to the potential increase in mortgage rates. This scarcity of inventory has led to heightened competition among buyers and rising home prices in most markets. However, certain markets, like Austin, have experienced a unique phenomenon where new listings have decreased, but the overall supply has increased, contributing to lower home prices. It will be fascinating to continue monitoring the housing market and see how this lock-in effect evolves.
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