Mortgage Market Update: Is the Lock-In Effect Finally Loosening?
The real estate market has been grappling with the mortgage rate lock-in effect—a phenomenon where homeowners with low-interest rates (below 5.5%) are hesitant to sell, reducing available housing inventory.
For years, this effect has kept many homeowners in place. Research suggests that for every 1% increase in current mortgage rates above a homeowner's existing rate, they become 18% less likely to sell. This has significantly contributed to the limited inventory seen in recent years.
However, there are signs that the lock-in effect is beginning to ease. Here’s why:
- People Can’t Stay Put Forever – Eventually, life changes—job relocations, expanding families, downsizing, and other circumstances—will outweigh financial hesitation.
- New Rate Reality is Setting In – Many homeowners are starting to accept 6-7% mortgage rates as the new norm and are becoming more open to selling.
- Life Events Drive Real Estate Moves – Whether due to career shifts, marriage, divorce, or a need for more (or less) space, life events continue to push people into the market.
Economic Update: No Rate Cuts Yet
As expected, the Federal Reserve decided to keep interest rates unchanged this past Wednesday (MBS Highway, 1/29/25). Key reasons for their decision include:
- A Strong Job Market – Employment remains solid, reducing the need for immediate rate cuts.
- Persistent Inflation – While not as high as before, inflation remains slightly above ideal levels.
- Steady Economic Growth – The economy continues to expand at a healthy pace, further justifying the Fed’s wait-and-see approach.
Looking ahead, the Fed is likely holding off on any cuts until at least June, when they may consider a modest 0.25% reduction. Additionally, factors such as potential tariff and immigration policy changes could influence inflation and impact future rate decisions.
For now, the housing market is adjusting to this evolving landscape. If you’re considering making a move, it’s worth staying informed on how mortgage trends could shape your buying or selling strategy.
