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The lock-in effect has cost the housing market 1.3 million home sales and put upward pressure on U.S. home prices, finds FHFA

"It looks like lock-in could be with us for a long time” wrote FHFA researchers in a working paper published on Monday.

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On Monday, researchers at the Federal Housing Finance Agency (FHFA) published a 52-page working paper titled “The Lock-In Effect of Rising Mortgage Rates.”

The FHFA analysis reveals that the lock-in effect—where homeowners with lower mortgage rates are unwilling to sell and purchase another home at significantly higher mortgage rates—has resulted in 1.3 million 'lost' home sales between Q2 2022 and Q4 2023.

The paper’s abstract starts: “People can be “locked-in” or constrained in their ability to make appropriate financial changes, such as being unable to move homes, change jobs, sell stocks, rebalance portfolios, shift financial accounts, adjust insurance policies, transfer investment profits, or inherit wealth. These frictions—whether institutional, legislative, personal, or market-driven—are often overlooked. Residential real estate exemplifies this challenge with its physical immobility, high transaction costs, and concentrated wealth. In the United States, nearly all 50 million active mortgages have fixed rates, and most have interest rates far below prevailing market rates, creating a disincentive to sell. This paper finds that for every percentage point that market mortgage rates exceed the origination interest rate, the probability of sale is decreased by 18.1%. This mortgage rate lock-in led to a 57% reduction in home sales with fixed-rate mortgages in 2023Q4 and prevented 1.33 million sales between 2022Q2 and 2023Q4.”

Not only has the lock-in effect cost the housing market 1.3 million home sales, but FHFA researchers find it has also put upward pressure on national home prices.

The supply reduction [created by the lock-in effect] increased [national] home prices by 5.7%, outweighing the direct impact of elevated [mortgage] rates, which decreased prices by 3.3%. These findings underscore how mortgage rate lock-in restricts mobility, results in people not living in homes they would prefer, inflates prices, and worsens affordability. Certain borrower groups with lower wealth accumulation are less able to strategically time their sales, worsening inequality,” wrote the FHFA researchers.

While new listings in February 2024 were still far below February 2019, they're up slightly on a year-over-year basis. That suggests the lock-in effect could be easing.

So, is the lock-in almost over? The analysis by FHFA researchers says no.

“In 2033, the lock-in effect on sales ranges from -54% with a 1-point increase [in mortgage rates] to -13% with a 2-point decrease [in mortgage rates]. Absent a dramatic decrease in [mortgage] rates, it looks like lock-in could be with us for a long time,” wrote FHFA researchers.

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