Mortgage Rate Lock-In Effect Paralyzes U.S. Housing Market

The U.S. housing market faces a 'mortgage rate lock-in effect,' leading to a drop in home sales and higher starter home prices, with experts predicting a 'higher for longer' mortgage rate environment.

author-image
Trim Correspondents
Updated On
New Update
Mortgage Rate Lock-In Effect Paralyzes U.S. Housing Market

Mortgage Rate Lock-In Effect Paralyzes U.S. Housing Market

The U.S. housing market is facing a significant challenge as the 'mortgage rate lock-in effect' continues to impact homeowners and potential buyers. According to a working paper by the Federal Housing Finance Agency, 96% of U.S. borrowers have fixed-rate mortgages, with 63% of them having rates below 4%. With current mortgage rates around 7%, many existing homeowners are reluctant to sell their homes and purchase new ones at the higher rates.

This lock-in effect has led to a decrease of approximately 1.3 million home sales from spring 2022 to the end of 2023, a significant drop compared to the usual 5 million annual home sales. The Biden administration has proposed a $10,000 tax credit for homeowners selling their starter homes, but analysts argue that this would not be sufficient to offset the higher mortgage payments.

Why this matters: The mortgage rate lock-in effect has far-reaching consequences for the U.S. economy, as it constrains the housing supply and makes it difficult for would-be home buyers to enter the market. This phenomenon not only affects the real estate sector but also has implications for labor markets and overall economic growth.

Chief Economist Mark Fleming of First American Data Analytics believes that a 'higher for longer' mortgage rate environment will further slow house price growth . Starter home prices are expected to face upward pressure due to the limited supply caused by the rate lock-in effect. Several major metropolitan areas, such as Nassau County, NY, Pittsburgh, Miami, and New York, are already experiencing over 10% year-over-year increases in starter home prices.

The recent rise in mortgage rates has been driven by sustained inflation and the Federal Reserve's monetary policy path. The average 30-year fixed mortgage rate has increased to 7.13%, up 11 basis points from the previous week, while 15-year fixed mortgage rates have risen to 6.64%, up 20 basis points. Experts believe that mortgage rates are unlikely to drop significantly until the Federal Reserve starts cutting the federal funds rate, which is not expected to happen until inflation is closer to the 2% target.

Mark Fleming noted that persistent inflation has diminished any optimism that the Federal Reserve may start to cut rates in June, meaning mortgage rates are likely to remain higher for longer in 2024. This 'higher for longer' mortgage rate environment is expected to further slow house price growth , with national house prices now 52% higher compared to pre-pandemic levels (February 2020).

Key Takeaways

  • 96% of U.S. borrowers have fixed-rate mortgages, 63% below 4% rate
  • Mortgage rate lock-in effect reduces home sales by 1.3M from 2022-2023
  • Starter home prices face upward pressure due to limited supply
  • Mortgage rates unlikely to drop until Fed cuts rates, not expected until 2024
  • National home prices 52% higher than pre-pandemic levels (Feb 2020)