Housing Market Decoded: The mortgage rate 'lock-in' effect 

Decisions in residential real estate are often based on market data — sometimes conflicting, often confusing. Housing Market Decoded, authored by economists and other market experts, helps put the data in context so you can make sense of the numbers.

A recent report by the Federal Housing Finance Agency concluded that the mortgage rate "lock-in" effect prevented 1.33 million home sales that otherwise would have occurred if homeowners had listed their homes for sale.

With sales last year at a near 30-year low, that is a big impact on the market.

The "lock-in" effect refers to the reluctance of homeowners to sell their home when they have a very low mortgage rate that they would have to give up, often to take on a mortgage with a much higher rate. Rate lock has been touted as the primary reason why there have not been more home sales transactions.

Let's do a little math. If a family purchased a $300,000 home in January 2021 when the average mortgage rate was 2.65%, they would have a monthly payment of about $1,500. Fast forward to April 2024, when rates were at 7% — more than 400 basis points higher — and the monthly payment on that $300,000 home is now $2,225, a nearly 50% increase.

But rates were not the only thing to rise during that period — prices also went up. If that family wanted to sell their home and purchase another home, the median sale price is now $400,000, which means at a 7% rate they would be looking at a monthly payment of roughly $2,900.

Anyone who bought or refinanced when mortgage rates were very low is facing a similar math problem. And that group of homeowners is large: About 70% of all mortgage holders currently have a rate that is more than three percentage points below today's average rate.

The numbers send a clear message — selling does not make sense for most homeowners when this is their bottom line.

There's more to selling a home than math

How do we explain, then, the steady increase in new listing activity over the past few months? The number of new listings coming on the market has been on the rise since January, and in April, according to Altos Research, new listing activity not only surpassed last year's level but was higher than during the pandemic.

The answer is that even though buying and selling a home are huge financial decisions, they are not solely financial decisions. A few other numbers can help shed light on why more homeowners might be selling in 2024.

First, some people have to sell. In Bright MLS's recent surveys of sellers' agents in the Mid-Atlantic, about 14% of listings are estate sales where family members are selling because the homeowner passed away. Health concerns also necessitate selling — about 17% of people selling their primary residence listed their home due to health reasons.

But the main reason people are selling now is the same as it has always been. Changing family circumstances, like getting married or divorced, having children, or retiring, are driving homeowners to list their home, even with "rate lock" looming. Our survey data indicates that more than one out of five homeowners are selling for family reasons.

What does it all mean for inventory in 2024?

While the gap between current and past rates will continue to keep some homeowners in their homes and inhibit supply, the inventory picture in 2024 will not be driven exclusively by the rate lock phenomenon.

Expect demographics factors, including death, retirement, marriage and children, to bring more listings onto the market as these "life happens" events unlock the rate lock handcuffs for some families.

Dr. Lisa Sturtevant has been involved in research on economic, demographic and housing market issues for more than 20 years. She is currently Chief Economist at Bright MLS, where she leads research and forecast activities for Bright and serves as a thought leader on the housing market. The views expressed in this column are solely those of the author.