Owners Not Selling? ‘Lock-In Effect’ Isn’t Only Reason

WASHINGTON – A study from Fannie Mae casts doubt on the theory that homeowners aren’t moving because their next-home mortgage rate will be notably higher than the one they currently have – something in the neighborhood of 3% secured during the Covid pandemic.

That generational low for mortgage rates caused a surge in home sales, which grew about 14% from 2019 to 2021 compared to a much slower 1% increase from 2018 to 2019. In 2022, however, rates doubled.

As a result, consumers responded, in part, by purchasing fewer homes and sales declined nearly 18% year over year.

“Many market observers, including us, have often attributed the decline in home listings to the so-called mortgage rate ‘lock-in effect,’ or the disincentive for existing homeowners to sell their homes because their current mortgage rate is well below current market rates,” Fannie Mae economists say. To better understand the rate-increase impact, they included questions about it in their National Housing Survey – whether respondents planned to stay longer in their current homes than originally intended and, if so, why.

The results suggest that the lock-in mortgage-rate effect is less than most people think.

Homeowners’ reasons for staying in place

• 29% of people with a mortgage and 29% of outright owners said that they plan to stay in their home longer than originally intended
• However, 45% of mortgage borrowers and 49% of outright owners do not plan to stay in their home longer than originally intended
• Mortgage borrowers (21%) said being “locked-in” to a low mortgage rate was the leading reason for staying longer, but “I like my current home” (19%) and “Home prices are too high” (13%) were close behind

“These findings, as well as others from the survey, indicate that there is more to the decline in existing homes for sale than just the lock-in effect,” say Fannie Mae economists.

“Looking at the responses more broadly by adding together those who responded ‘yes’ and ‘maybe” to the plan-to-stay-longer question showed that a slight majority (54%) of mortgage borrowers may stay in their homes longer,” they found. “Of those, … 62% indicated that having a low mortgage rate was only one of several (reasons). This means that, in total, 33% of all mortgage borrowers who may stay in their homes longer considered their low mortgage rate to be a factor.”

Why so few homes for sale then?

Economists found that multiple factors contribute to the drop in home listings, and the survey “paints a significantly more nuanced picture.”

The pandemic period also played a role, they said, by emphasizing some non-financial factors. Some buyers sought out desirable homes in vacation destinations since they no longer had to go into the office. Others spent heavily on remodeling and upgrading their home.

In addition, sales during the period of low rates may have expanded at the expense of current-day rates. Those who had a propensity to move “within the next few years,” may have shortened their timeline; and that, in turn, removed some potential sellers from the current market.

“There are also demographic and generational shifts to consider,” the economists say. “For instance, baby boomers represent 32% of homeowners, and over 80% said they would like to age in place. This preference is likely also contributing to the supply shortage.”

In addition, people, in general, aren’t moving as much. “The percentage of movers annually has steadily decreased from 16.8% to 12.6% from 2006 to 2022. A Fannie Mae analysis in 2020 showed that existing homeowner mobility rates were 25% lower than during the pre-Great Recession period (circa 2000) and that mobility had declined across all age groups.”

Their conclusion? “Given these results, even if mortgage rates were to decline meaningfully in the intermediate term, we would not expect to see a surge in home listings.”

Source: Fannie Mae’s Economic and Strategic Research (ESR) group

© 2023 Florida Realtors®