The Lock-in Effect is Thawing and More Houses are Coming On the Market

There’s a prevailing notion that the steadfast grip on low mortgage rates has tethered homeowners to their properties, causing a widespread shortage of available homes across the nation. However, the dynamics of this “lock-in effect” are now shifting, prompting speculation about its potential impact on real estate prices in the coming years.

The lock-in effect, a significant factor behind the sustained high housing prices, stems from borrowers securing historically low interest rates, disinclining them to sell. Many initially locked in rates below 3%, and with current rates doubling, coupled with rising prices, property owners have found themselves in a wait-and-see stance. Recent data from Zillow indicates that this lock-in effect is gradually thawing, carrying significant implications for the real estate landscape.

Zillow’s survey in June 2023 reveals a noteworthy shift, with nearly a quarter of homeowners either listing their homes for sale or contemplating doing so within the next three years—a substantial increase from the previous year. Homeowners with mortgage rates above 5% are almost twice as likely to consider selling compared to those with rates below 5%. Redfin’s data echoes this trend, highlighting a decline in the percentage of homeowners with rates below 6%, suggesting a tangible impact of the lock-in thawing effect.

While over 88.5% of homeowners still enjoy rates below 6%, a decrease from the peak in mid-2022, some are choosing to relinquish their low rates to facilitate a move. Life events, such as births, job changes, or divorces, are prompting these homeowners to reconsider their staying put strategy. Additionally, the pandemic-induced equity surge has empowered many to sell their homes, relocate to more affordable areas, and potentially pay cash for a new property.

The imminent thawing of the lock-in effect is poised to bring more homes onto the market, likely starting in the spring. This anticipated surge in inventory could lead to a moderation of prices, but the extent of the decline remains uncertain.

Two critical factors will influence the impact of the lock-in effect on prices:

1. Inventory Growth: The pace at which homes enter the market will hinge on labor market dynamics. A substantial weakening of the labor market could trigger a significant uptick in inventory, while a stable labor market may result in a more gradual increase.
2. Interest Rates in the Spring/Summer: The trajectory of prices will be closely tied to interest rates. Despite predictions of a sharp decline from real estate experts, factors such as inflation, robust spending, and a strong labor market may keep rates relatively stable.

In summary, while the thawing lock-in effect suggests an increase in inventory, a substantial wave of homes hitting the market may not materialize immediately, given the current economic health. Predictions point to a moderate decline in prices, possibly in the range of 5-10% over the coming year. However, the potential risks associated with trade disruptions, inflation spikes, or weakened consumer credit emphasize the need for caution, indicating that a full recovery from the uncertainties of a hard landing is not guaranteed.