Throughout the pandemic housing boom, homebuyers have been jumping at the chance to secure mortgages at rates as low as 2% to 3%, creating a whirlwind of housing market transactions. But now, a growing frustration is seeping into the industry as those bafflingly low rates have given way to a stark reality of higher rates and fewer transactions. What caused this shift in the housing market? Enter the “lock effect,” a term that causes real estate professionals to sound the alarm and grapple with the consequences of the sudden change.
The idea of the “lock effect” is that homeowners are reluctant to sell their properties — and buy something new — because of the financial shock that would come with missing out on historically low mortgage rates for something with a 6% or 7% interest rate.
Sean Dobson, founder and CEO of Amherst Real Estate, may have summed up frustration best when tweeted recentlyFinancing this at 3%. [mortgage rates] Then jump rates to 6%. [rates] It’s the same as burning it [the homes] From a presentation perspective.”
Dobson, who runs one of the largest single-family homeowners in the United States, was responding to a map I made luck (See below) shows the massive drop in the number of homes for sale across the country.
This so-called “locking effect” occurs almost everywhere. Resilient East Coast markets such as Richmond, VA and Philadelphia saw new listings decline by 27% and 26%, respectively, year-over-year. While even Austin, a market still going through a home price correction, saw a 31% year-over-year decline in new listings on realtor.com between June 2022 and June 2023.
According to Realtor.com, the number of homes for sale in the United States decreased 26% in June 2023 from June 2022, and 28.9% less than in June 2019.
To better understand the effect of locking in, just consider the fact that 91% of mortgage borrowers have an interest rate of less than 5%, including 70.7% with an interest rate of less than 4%. For homeowners, it doesn’t make sense to buy and sell a property right now with a mortgage rate of 6% or 7%.
The limited amount of inventory on the market stoked competition among buyers and caused home prices to rise in the first half of the year – the strong seasonal part of the year – in most markets. The Northeast and Midwest markets, in particular, saw stronger-than-expected home price gains this spring.
However there are some exceptions.
Just take a look at the Austin housing market, and you’ll see something extraordinary happen. Despite a sharp 31% drop in new listings (that is, homes for sale in a given month), Austin home prices are still down 13% from their peak, according to Black Knight. The reason for this interesting phenomenon is that the total supply on the market (i.e. active listings) increased by 47% year-on-year, even as new listings declined. Austin home prices skyrocketed about 60% in the first two years of the pandemic, creating a huge shock to affordability once mortgage rates went up, causing homes to stay longer on the market. Instead of watching sellers rush in, Austin is seeing a cumulative effect, driving home prices there even as most markets are up again.
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