A recent report has shed light on the reluctance of homeowners to sell their properties, largely due to the allure of their existing mortgage rates.
The April ICE Mortgage Monitor report has unveiled compelling insights, indicating that homeowners are hesitant to sell their homes even in the face of enticing opportunities. The report reveals that the average homeowner would witness their monthly payments more than double if they were to upgrade to a home just 25% more expensive.
Andy Walden, Vice President of Enterprise Research Strategy at ICE, emphasized the significance of this trend, stating, “After American mortgage holders secured some of the lowest first lien rates ever and benefited from record home price growth on top of that, we wanted to quantify just how locked-in folks truly are and what kind of rate declines would be needed to shake some of that inventory loose.”
Even a lateral move to a similarly priced home nearby would result in a substantial increase in payments, with an average jump of 40% in principal and interest payments, approximately $500 extra per month, according to Walden. This phenomenon, known as the "lock-in effect" serves as a major deterrent for homeowners considering selling their properties and is a significant contributor to the ongoing scarcity of homes for sale in the market.
Walden further elucidated, “You’d be hard-pressed to find a more vivid illustration of the lock-in effect that’s kept for-sale inventory in a hole for the last few years. Lower rates would ease the calculation for many and make moves more reasonable. But the net result continues to be too few homes for too many buyers. Until that fundamental mismatch is addressed, simple supply and demand will continue to press on both inventory and affordability.”
Although inventory levels experienced a slight increase in February 2024, they still remain 40% lower than pre-pandemic averages. Encouragingly, in February 2024, 60 major US markets witnessed more homes for sale compared to the same month a year prior, hinting at potential relief on the horizon.
“After closing out 2023 at an 11-year low, home sales have begun to improve over the last two months,” noted Walden. “In fact, lower interest rates in late Q4 and early Q1 led to February home sales hitting their highest adjusted level since March 2023."
The lock-in effect is particularly pronounced in high-cost California markets such as Los Angeles, San Diego, San Francisco, and San Jose, where homeowners may face staggering payment increases of over 140% for slightly larger homes.
“Mortgage rates need to come down to dislodge the lock-in effect,” emphasized Walden. “That’s key to our mission at ICE – identifying and eliminating inefficiencies in housing finance through technology while finding smarter, faster, cheaper, and more transparent ways to originate loans and increase liquidity.”
As the housing market continues to navigate these challenges, homeowners and potential buyers alike remain vigilant for shifts in mortgage rates and inventory levels, anticipating their impact on affordability and accessibility in the housing market.