Throughout the pandemic housing boom, buyers jumped at the chance to secure mortgages at ultra-low rates of 2% to 3%, creating a whirlwind of transactions in the housing market. But now growing frustration is seeping into the industry as those once incredibly low rates have given way to a harsh reality of higher rates and fewer transactions. The cause of this change in the housing market? Enter the “lock-in effect,” a term that has real estate professionals sounding the alarm and dealing with the consequences of abrupt change.
The idea of the “lock-in effect” is that homeowners are reluctant to sell their properties – and buy something new – due to the financial shock that would come with losing their historically low mortgage rates to something with a handful of 6% or 7%.
Sean Dobson, founder and CEO of real estate powerhouse Amherst, might have best summed up the frustration when he tweeted recently: “Financing them at 3% [mortgage rates] then jump rates to 6% [rates] equivalent to burning them [the homes] from a supply perspective.
Dobson, who runs one of the largest owners of single-family homes in the United States, was responding to a card produced by Fortune (see below) showing the huge decline in the number of homes for sale across the country.
This so-called “lock-in effect” is happening all over the place. Resilient East Coast markets like Richmond, Va. and Philadelphia saw new listings decline 27% and 26%, respectively, year-over-year. While even Austin, a market still experiencing a home price correction, saw a 31% year-over-year decline in new listings on realtor.com between June 2022 and June 2023.
See this interactive chart on Fortune.com
According to Realtor.com, there were 26% fewer US homes for sale in June 2023 than in June 2022, and 28.9% fewer than in June 2019.
To better understand the lock-in effect, consider the fact that 91% of mortgage borrowers have an interest rate below 5%, including 70.7% with an interest rate below 4%. For these homeowners, it just doesn’t make much sense to sell and buy a property right now at a 6% or 7% mortgage rate.
See this interactive chart on Fortune.com
The limited amount of inventory coming to market has fueled competition among buyers and pushed home prices higher in the first half of the year – the seasonally strong part of the year – in most markets. The Northeast and Midwest markets, in particular, saw stronger-than-expected home price increases this spring.
However, there are some exceptions.
Just take a look at the Austin real estate market and you’ll see something unusual happen. Despite a steep 31% drop in new listings (i.e. homes for sale in a given month), home prices in Austin are still down 13% from the peak, according to Black Knight. The reason for this intriguing phenomenon lies in the significant increase in overall market supply (i.e. active listings) of 47% year over year, even as new listings have declined. House prices in Austin skyrocketed about 60% in the first two years of the pandemic, resulting in a significant affordability shock once mortgage rates soared, causing homes to linger longer on the market. Rather than seeing a rush of sellers, Austin is experiencing a stacking effect, which is driving down home prices there even as most markets rise again.
Want to stay up to date on the housing market? Follow me on Twitter at @NewsLambert.
This story was originally featured on Fortune.com
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