Seller's Market? Buyers Market? Neither, Blame The Lock-In Effect

Zinger Key Points
  • Nearly 85% of homeowners have interest rates that are much lower than the current average of 6.81%
  • This is causing homeowners to feel reluctant to sell their home, creating the "lock-in" effect.
Seller's Market? Buyers Market? Neither, Blame The Lock-In Effect

Homebuyers who were fortunate enough to purchase in 2021 and earlier this year were able to lock in incredibly low mortgage rates.

However, given the sharp rise in rates since then, individuals who currently have lower rates may be feeling the "lock-in effect," which some experts characterize as homeowners who locked in a lower rate being unwilling to sell their home and buy a new one with higher interest rates.

The Data: Nearly 85% of American homeowners who have mortgages have interest rates that are much lower than the current average of 6.81%.

Some of those homeowners are deterred from moving because doing so could mean giving up their low mortgage rate and assuming a higher monthly housing payment, with rates ebbing around their highest levels since the 2008 financial crisis.

That is supported by a study of data from the Federal Housing Finance Agency (FHFA) by Redfin Corp RDFN.

Read also: You Now Need To Earn At Least $107,281 Annually To Own A Home

A fall in existing house sales is being caused by the high percentage of homeowners who feel trapped into their cheap mortgage rate.

In October, existing home sales continued a nine-month trend of declines, down 5.9% year over year. This contributed to the 24% year-over-year decline in new listings, the biggest decline ever seen (apart from April 2020, when the pandemic brought the housing market to a standstill).

The "lock-in" effect is present in most U.S. markets.

Redfin discovered that homeowners in Atlanta, Chicago, Los Angeles, and Washington, D.C. were 7.6% less likely to list their houses for sale in August than homeowners with a rate above 3.5%.

Though some homeowners and investors are turning to rental properties as a way to earn passive income in the current housing market. Here’s how to invest as little as $100 in rental properties and build wealth over the long term.

“The Fed’s actions to curb inflation are causing the housing market to slow at a pace not seen since the financial crisis,” said Redfin Economics Research Lead Chen Zhao.

Another indicator of a cooling market is how long a home stays on the market.

The typical home sold in October was on the market for a median of 35 days, up from 21 days a year earlier.

To read about the latest developments in the industry, check out Benzinga's real estate home page.

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