How the ‘lock-in effect’ is helping shape today’s housing market

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How the ‘lock-in effect’ is helping shape today’s housing market
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Are we in another housing bubble? Will home sales and prices collapse? Will we ever be able to afford a house again?

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With mortgage rates at 20-year highs, homes for sale are few and far between, yet prices continue to rise. Good questions.The existing home market, which constitutes 90% of total home purchases, is fading. Sales did pick up during the pandemic as panic buying and work-from-home relocations led to a jump in demand. But that was a temporary uptick, and the level of new home purchases faded fairly quickly. Indeed, next year sales could be the lowest in nearly 30 years.

And that raises the question, why are people not putting their homes on the market when prices have risen so much over the past few years? It’s largely due to the surge in prices and mortgage rates, but not for the normal reasons. The unwillingness to trade in a low-rate mortgage for a high-rate one, a threat that economists warned about years ago, has been nicknamed the “lock-in effect.” Goldman-Sachs estimated that “nearly all mortgage borrowers have interest rates below current market rates, and that almost 90% have rates more than 2pp below and over 60% have rates more than 4pp below.”

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