What To Know About the ‘Lock-In Effect’ - Home & Texture
Homeownership Lock-In Effect

Understanding the ‘Lock-In Effect’ the Housing Market Is Experiencing Now

July 17, 2023 at 10:22 PM PST

It’s hard to tell if the current housing market is more favorable to buyers or sellers. A recent report by Fortune looked at the market’s current condition, and some experts believe there’s a clash between the two. This phenomenon is called the lock-in effect and has only happened a handful of times in recent history.

The lock-in effect is described as homeowners who choose not to sell their homes—even when they want to—due to current interest rates, scarcity of homes available, and housing prices. In other words, current homeowners are having a hard time finding a new home at the same bargain they bought their current home. This impacts the market because the fewer people that want to sell, the more people want to buy, which drives up prices.

How the Lock-In Effect Impacts First-Time Homeowners

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Experian reported that in a Redfin analysis of Federal Housing Finance Agency (FHFA) data, “85% of homeowners with a mortgage have a rate lower than 6%. On top of that, a Zillow estimate of 2019 Census data found that 37% of homeowners own their homes outright and don’t have to worry about a mortgage at all.”

Current homeowners were able to capitalize off record-low interest rates in 2022. Now, those same homeowners aren’t selling their homes because the new interest rates are a stark difference from what they are already paying.

Another aspect of the lock-in effect is how it impacts the housing supply. With fewer homes available for sale, the limited housing supply puts sellers in a challenging situation, compelling them to raise prices. To be fair, what homeowner would want to sell their home with a 2% or 3% mortgage rate to buy a new home for 6% or 7%?

Redfin reported that this housing stall has contributed to almost a quarter drop in home listings. This makes for the largest drop-off since May 2020.

Despite these unflattering circumstances, economists still believe there is an opportunity for first-time homebuyers. It’s recommended to work on your credit and get your credit health to good standing to get the best loan possible.


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