The "Lock-In" Effect

Written by Elijah Hughes

A "lock-in" effect is caused when homeowners who would normally sell their home are disincentivized to do so because of changing factors in the real estate environment. In today's market, those factors are mortgage interest rates and rising home prices.

According to a Redfin study made earlier this year, 89% of homeowners have a mortgage rate below 6%. Almost 79% have one below 5%. And just under 60% have a rate below 4%. Today, mortgage rates are fluctuating between 7-8%. This means that virtually anyone selling their home would be taking on a higher interest rate if they choose to buy again.

And for every 1% that mortgage rates increase, buyers lose about 10% of their purchasing power. In fact, according to a separate report, about 38% of homeowners said they could not afford to buy their current home if it were on the market today.

In the graph below, you'll see the average mortgage rate among all homeowner's by state.

These constraints are mostly felt by first-time homebuyers. Many homes that would normally be available to them are not hitting the market because more homeowners are staying put instead of trading up for their next home.

A Federal Housing Finance Agency analysis found that approximately 1.3 million home sales were 'lost' between Q2 2022 and Q4 2023 alone. They stated, "Absent a dramatic decrease in rates, it looks like lock-in could be with us for a long time.”

Because of the limited supply among entry level homes, prices get pushed up as people compete with one other. And prices will continue to rise until demand outpaces supply. Investopedia stated that in the lock-in effect "demand may simply fall to reach equilibrium with supply, which means prices will stabilize rather than fall."

I have mixed feelings when people say it's a bad time to buy. I think they mean that it's not an easy time to buy. It would be a bad time to buy if home prices were on the verge of collapsing, which I cannot find any data to suggest will happen.

The best time to buy is when you are able to. Remember, it's unlikely that your first home is your forever home. If you'd like to discuss the market or whether or not you should buy now, click below!

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