What Is the “Lock-in Effect” Doing to the Housing Market?

Market Update

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After spending a week above 7%, interest rates dip back down into the high 6% range again.

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The markets were treading water without any earth-shattering news, waiting for Jerome Powell and the Fed to provide some insight this week. When that happens, the lack of news can make traders a little jittery, so they tend to become a little nervous. That's part of the reasons why we saw the rates go above 7%. They are always trying to anticipate what the Fed is going to do.

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We received welcome news after the Fed's two-day meeting and the press conference held by Jerome Powell, the Fed chair, after their meetings. While Wall Street was changing their assumptions prior to the meeting that the Fed would only do two rate cuts this year to the Fed funds rate, it came out that the Fed still anticipates three rate cuts.

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The primary reason for this had to do with the job market. We've seen inflation come down, and it will be harder and harder to get down to that 2% inflation target. The Fed realizes that if they stay too high for too long, it could easily impact the job market and send the economy into a recession. If they press too hard on the job market, it could completely get stressed out and get out of whack. The unemployment figures could go way up, consumers could stop spending, employers stop hiring... The Fed wants to avoid this at all costs so they don't, so they need to ease up a little bit just to keep that job market solid and not get off track.

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Going forward, it is highly likely that rates will just kind of do a general glide downward slowly instead of a steep, quick decline. This could help avoid a frenzied real estate market if rates were to drop too quickly.

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Talking about the real estate market, the Federal Housing Finance Agency (the FHFA) just released a white paper analyzing the lock-in effect of rising mortgage rates. The FHFA tracks all homes that are sold and purchased with a mortgage. We all know that sellers have been very reluctant to give up their low interest rate mortgage, but to what extent?

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In a nutshell, the paper found that the mortgage rate lock-in effect led to a 57% reduction in home sales with fixed-rate mortgages in Q4 of 2023 and prevented 1.33 million sales between Q2 2022 and Q4 2023. It further went on to say that the reduction in supply increased home values by 5.7%, outweighing the direct impact of elevated rates, which decreased prices by 3.3%.

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It's what we've talked about a lot. It's a supply issue that is driving up values more than the increase in interest rates. As rates drop, we will hopefully see more of these locked-in homeowners list their homes and be able to move with the life changes that so often occur over time.