High mortgage rates have resulted in a so-called lock-in effect — which refers to the idea that existing homeowners with low mortgage rates obtained prior to summer of 2022 have little incentive to sell their homes. As a result, lock-in effect is blamed for some of the current housing market ills, namely, the lack of inventory of homes for sale and resultant pressure on home prices.
Given continually elevated mortgage rates since 2022, improvements in for-sale inventories have been painfully slow in many regions. Nevertheless, there are markets where existing homes for sale showed a notable rise over the course of 2024, particularly in Florida, Texas and the Southwest, including Arizona, Colorado and Nevada.
As a result of more housing turnover in those markets, the weighted average existing mortgage rate is slightly higher than in markets with less recent turnover. With more available inventory, more purchases have been made in the past couple of years when interest rates were higher, pushing the weighted average interest rate higher. For example, in California’s large metro areas, the weighted average rate is about 3.5%. In contrast, in Florida and Texas markets, the average rate is closer to 4.4%.
However, with mortgage rates surging again, particularly leading up to and after the Federal Reserve meeting in December, how much more improvement is likely to be seen in the year ahead and what is the impact on affordably priced inventory of homes for sale?
Even with recent purchase originations since 2022 at over 6%, 87% of the outstanding mortgage debt has rates below 6%, while 80% is below 5%. That suggests that many existing homeowners are still having to make a difficult decision of giving up their very low mortgage rate for one that is considerably higher if they sell their home. Note, however, that about 40% of homeowners own their home free and clear and for them the current mortgage rate may not be the determining factor in selling their home, but it may be if they are looking to buy another one.
In addition, however, there is a relatively higher share of affordably priced homes with low lock-in rates. The table on this page summarizes the distribution of existing mortgage rates across price ranges. Among homes priced below $300,000, 73% to 75% have mortgage rates below 5%, while among homes priced above $500,000, some 61% have mortgage rates below 5%.
A higher proportion of lower priced homes with low mortgage rates indicates that it may be difficult to see more affordable homes for sale available in next few years. Some, again, may come from those owners who own their homes without a mortgage and particularly baby boomers who may be aging out of homeownership.
