Redfin: Lock-In Effect Loosening

NEW YORK – A growing number of homeowners with low interest rate mortgages aren’t waiting to move until rates have dropped. Rather, they’re increasingly opting to move into new homes and take on higher interest rate mortgages, according to Redfin.

The share of homeowners with a rate below 6% has fallen to 88.5% from its record high of nearly 93% in mid-2022. That means the lock-in effect – the reluctance to lose a low-interest mortgage rate for a higher interest one – still has a strong hold on homeowners, but not as much as before.

Some homeowners are also selling because they saw their home values soar during the pandemic, so they have enough equity to sell and take on a higher rate, particularly if they’re downsizing or moving to a more affordable area. 

Another reason for the dip: Anyone who purchased a home in the last year — both repeat buyers and first-time buyers — entered the market at a time when the average mortgage rate was above 6%, Redfin found from its analysis of 2023 third-quarter data from the Federal Housing Finance Agency’s National Mortgage Database. The current rate is 6.6%.

“The share of homeowners with rates below 6% likely fell further in the fourth quarter because a dip in mortgage rates drove more people to buy and sell homes, even as rates remained above 6%,” Redfin researchers said in the report.

The reasons homeowners are selling today varies – major life events like a divorce or death gives them no other choice, while others are putting their homes on the market because they want to live in a different house or city.

“Nearly all homeowners with a mortgage have a rate below the one they would get if they bought a home today, but the difference in monthly payments varies depending on each individual situation. A mortgage holder in the 3% to 4% range is more likely to feel handcuffed to their home than someone in the 5% to 6% range, for instance,” Redfin researchers said.

One real estate agent told Redfin that sellers understand rates aren’t dropping back down to 3% anytime soon.

“But a lot of sellers are worried about finding their next house because even though listings are rising, there’s still a housing shortage,” the agent said. “That’s part of the reason so many sellers remain on the sidelines.”

Here’s the full breakdown of where today’s homeowners fall on the mortgage-rate spectrum:

• Below 6%: 88.5% of mortgaged U.S. homeowners have a rate below 6%, down from a record 92.8% in the second quarter of 2022.
• Below 5%: 78.7% have a rate below 5%, down from a record 85.6% in the first quarter of 2022.
• Below 4%: 59.4% have a rate below 4%, down from a record 65.3% in the first quarter of 2022.
• Below 3%: 22.6% have a rate below 3%, down from a record 24.6% in the first quarter of 2022.

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