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Examining the Impact of the ‘Lock-in Effect’

New commentary from Fannie Mae experts highlights the unintended consequences of the policy response to the COVID-19 pandemic, a dramatic decline in mortgage rates that allowed millions of homeowners to refinance their mortgages at rates well below current levels.

Additionally, as housing needs changed and mortgage rates moved lower, home sales jumped, growing approximately 14% from 2019 to 2021 compared to a much slower 1% increase from 2018 to 2019. In the study, Mark Palim, VP and Deputy Chief Economist at Fannie Mae and Rachel Zimmerman, Market Research Advisor for National Housing Survey Lead detail the current trends surrounding the housing market as affordability remains a challenge for Americans nationwide.

In 2022, mortgage rates doubled, but consumers have adjusted to rising rates, in part, by purchasing fewer homes. As a result, homes sales declined nearly 18% year-over-year (YoY). This year, while new home sales have rebounded, the scarcity of existing home sales has persisted, declining from a peak annualized sales pace of 6.6 million units in January 2021 to 4.0 million annualized in August 2023.

As of August, the number of existing homes for sale hovered around 1.1 million, 40 percent below the level seen in August 2019, pre-pandemic. As of this writing, in 2023, the 30-year fixed-rate mortgage is at 7.79%, more than one full percentage point above where they were at the end of 2022.

Many housing market observers have often attributed the decline in home listings to the mortgage rate "lock-in effect"—or  the disincentive for existing homeowners to sell their homes because their current mortgage rate is well below current market rates.

To better understand this effect, in Q1 of 2023 Fannie Mae surveyed homeowners via their National Housing Survey on their plans to stay longer in their current homes than originally intended and, if so, why.

In summary, the survey found that:

  • An equal share (29%) of people with a mortgage (mortgage borrowers) and outright owners (homeowners without a mortgage) said that they do plan to stay in their home longer than originally intended, while 45% of mortgage borrowers and 49% of outright owners said they do not plan to stay in their home longer than they originally intended.
  • While mortgage borrowers indicated that being "locked-in" to a low mortgage rate was the leading reason for staying longer in their homes (21%), there were other reasons close behind, including that they like their current home (19%) and that home prices are too high to buy another home (13%).

These findings, as well as others from the survey, indicate that there is more to the decline in existing homes for sale than just the lock-in effect.

As said, mortgage rate lock-in is only one reason homeowners are staying put. Only 29% of mortgage borrowers said that they plan to stay in their homes longer. Importantly, of that population, 21% said this was primarily due to having a low mortgage rate, a subset that would represent only 6% of all mortgage borrowers. The other top reasons for staying put were "I like the home/location" at 19%, "home prices are too high to buy," and "my job and family are located here" at 13% each.

Looking at the responses more broadly—by adding together those who responded "yes" and "maybe" to the plan-to-stay-longer question—showed that a slight majority (or 54%) of mortgage borrowers may stay in their homes longer. Of those, when asked to pick all of the reasons why they would consider staying longer, 62% indicated that having a low mortgage rate was only one of several. This means that, in total, 33% of all mortgage borrowers who may stay in their homes longer considered their low mortgage rate to be a factor.

The other top reasons given were "I like the home/location" at 62%, "home prices are too high" at 57%, and "job and family are located here" at 57%. Altogether, this is a strong indication that borrowers weigh multiple factors when considering how long to stay in their homes, both financial and non-financial.

Nearly half of mortgage borrowers said that they haven't changed the amount of time they plan to stay in their homes, and somewhere between 6% and 33% of current mortgage borrowers plan to stay longer, at least partly due to the lock-in effect. These findings suggest to us that a fairly strong majority of mortgage borrowers' future moving plans may not be affected by their mortgage rate.

These survey results lead us to conclude that there are multiple factors contributing to the historically low supply of existing homes for sale. While the lock-in effect is real for many consumers, the full range of reasons provided by mortgage borrowers and outright owners for planning to stay in their homes longer paints a significantly more nuanced picture. Several reasons, including simply liking the home and placing value on living near family, friends, and their workplace, have also contributed to the lack of supply.

The pandemic period likely emphasized some of these non-financial factors as well, since many consumers spent more time in their homes and invested heavily in home remodeling and assorted do-it-yourself projects.

Additionally, the low-rate environment during the pandemic accelerated home purchases for many, pulling forward home listings and sales that likely would have been more evenly distributed in subsequent years. There are also demographic and generational shifts to consider. For instance, Baby boomers represent 32% of homeowners, and over 80% have said they would like to age in place. This preference is likely also contributing to the supply shortage.

The long-term decline in consumer mobility is another underlying trend that we believe is constraining listings. Census data indicate that the percentage of movers annually has steadily decreased from 16.8% to 12.6% from 2006 to 2022. A Fannie Mae analysis in 2020 showed that existing homeowner mobility rates were 25% lower than during the pre-Great Recession period (circa 2000) and that mobility had declined across all age groups.

Overall, there is a confluence of factors and trends contributing to the lack of housing inventory in the U.S., with the lock-in effect functioning as one of several. For more homeowners to be incentivized to put their homes on the market, other factors beyond mortgage rates may have to change, such as older generations aging out of their homes. As it stands now, and given these results, even if mortgage rates were to decline meaningfully in the intermediate term, Fannie Mae suggests they would not expect to see a surge in home listings.

To read the full report, including more data, charts, and methodology, click here.

About Author: Demetria Lester

Demetria C. Lester is a reporter for DS News and MReport magazines with more than eight years of writing experience. She has served as content coordinator and copy editor for the Los Angeles Daily News and the Orange County Register, in addition to 11 other Southern California publications. A former editor-in-chief at Northlake College and staff writer at her alma mater, the University of Texas at Arlington, she has covered events such as the Byron Nelson and Pac-12 Conferences, progressing into her freelance work with the Dallas Wings and D Magazine. Currently located in Dallas, Texas, Lester is an avid jazz lover and likes to read. She can be reached at [email protected].
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