Rate-Locked Homeowners Fuel Housing Shortage Amid Still-High Mortgage Rates

Selling a home remains an undesirable option due to high mortgage rates, data shows.

What Happened: Homeowners fortunate enough to secure lower mortgage rates are significantly less likely to consider selling and moving. That’s due to the lock-in effect, according to Zillow Group Inc Z ZG.

The Rate Lock Effect: Around 90% of mortgage holders currently have rates below 6%. About 80% of holders have rates below 5%.

Mortgage rates currently hover near 7%. A majority of today’s mortgage holders would need to finance a new home at a higher rate than their current one. That creates a strong incentive to stay put.

Zillow’s survey showd that homeowners with mortgage rates below 5% are twice as likely to want to hang onto their current home.

On the other hand, mortgage holders who reported rates higher than 5% are nearly twice as likely to plan to sell their home in the next three years.

A stark divide can be seen between homeowners with mortgage rates in the range of 4%-4.99% and 5%-5.99%.

Roughly 41% of homeowners at 5%-5.99% consider selling, while only 26% of those at 4%-4.99% say the same, according to Zillow's data. There’s evidence to suggest that the rate at which homeowners are less likely to move fluctuates between 4% and 5%, with potential influences from market trends.

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The ‘Lock-In’ Effect Across U.S. Markets: The lock-in effect is widespread across U.S. markets. Homeowners in cities like Atlanta, Chicago, Los Angeles, and Washington, D.C. are less likely to list their homes for sale compared to homeowners with rates above 3.5%.

The reluctance of homeowners to sell due to the rate lock effect has serious implications for the housing market, particularly on the housing supply.

If available supply is not on the market, more home builders are forced to build new homes. Once mortgage rates come down and those "locked-in" homeowners begin to sell, it can introduce an influx of homes to the market that can ultimately draw down prices.

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