Housing market: Mortgage ‘lock-in’ could last years, worsen wealth gap

Angle down icon An icon in the shape of an angle pointing down. Ierbank/Getty Images High mortgage rates could end up freezing the housing market for a long time, according to a group of researchers. Unless rates fall dramatically, the mortgage “lock-in” effect could last for years, they warned in a recent paper. That could result in higher home prices and end up worsening the wealth gap.

The mortgage rate “lock-in” effect — the phenomenon that’s frozen over the US housing market and vaulted home prices higher — could end up lasting for years to come, according to a group of researchers at the Federal Housing Finance Agency.

That spells bad news for prospective homebuyers, particularly those in lower wealth brackets. High mortgage rates sticking around could end up worsening wealth inequality and suppressing home sales for a decade or more, researchers wrote in a recent working paper. 

High mortgage rates have tanked home sales over the past year, as existing homeowners are looking to hold onto lower rates at which they financed their homes years ago. 2023 marked the worst year of sales since 1995. 

The 30-year fixed mortgage rate eased to 6.34% the past week, according to Freddie Mac data, though 89% of homeowners financed their homes at a rate below 6%, per a 2023 Redfin analysis. 

High mortgage rates keeping sellers out of the market likely prevented the sale of around 1.33 million homes between the second quarter of 2022 and the end of last year, the researchers estimated. Those unsold homes alone likely pushed up home prices by 5.7% as supply failed to meet demand. 

That dynamic might be intact for a long time, given the current gap between the market’s mortgage rates and the rates homeowners have already secured. Even if interest rates were to fall by two points, sales would still likely be suppressed to 13% below their baseline in 2030, according to the paper.

Meanwhile, a single-point increase in interest rates is expected to significantly worsen the lock-in effect in the near-term, suppressing sales to 51%-71% below the baseline level, researchers estimated. 

“Absent a dramatic decrease in rates, it looks like lock-in could be with us for a long time,” they added. 

Other housing economists have warned that the mortgage rate-fueled freeze could be here to stay. Mortgage rates are influenced by interest rates in the economy — and neither look poised to fall significantly anytime soon, as the Fed could keep rates higher for longer while it monitors the pace of inflation. 

Continued mortgage rate lock-in could result in higher home prices, lower housing mobility, and more people living in homes they’d rather not, the paper said. Buyers of a lower wealth class will have a particularly hard time, as they won’t be able to time the market as well to secure a lower mortgage rate for their homes.

“This lock-in prevents certain households from optimizing their housing and location choices. More affluent borrowers can better time their home sales strategically, widening the wealth inequality gap. Even with moderate decreases in interest rates, these effects are likely to remain present for years to come,” the working paper said. 

The housing market was the most unaffordable since 2013 last year, according to a separate Redfin analysis. Experts say affordability is only set to improve slightly in 2024, as the supply of available homes for sale remains tight.