Ready to Buy a Home? The Easing Lock-In Effect Means More Options for You

A few years ago, the real estate market experienced an astonishing housing boom.

Brought on by the pandemic, both buyers and sellers reaped the rewards. Homebuyers saw record-low mortgage rates and sellers enjoyed a substantial spike in home equity.

In the years following the surge, an interesting phenomenon occurred. A blend of factors, including battles with inflation, mortgage rates soaring from the 3’s to the 7’s, limited inventory, and elevated home prices led to what’s come to be known as the “lock-in effect”.

This effect resulted in current homeowners being hesitant to relocate due to the probability of facing higher mortgage rates. Consequently, this reluctance has impeded many buyers and sellers from actively engaging in the market.

But several indications, such as home sales ticking up in recent months — signaling that the hold of the lock-in effect on potential sellers may be loosening.

The lock-in effect and its impact on home buying

According to Realtor.com, 79% of potential sellers have felt trapped in their homes due to having a low interest rate on their existing mortgage, causing disruptions to household decisions and the overall housing market.

Both buyers and sellers have become impeded from actively participating in the market. And it appears their reluctance isn’t without merit.

Let’s say, for example, a homeowner’s current mortgage amount is $400,000 with an interest rate of 3.5%. Your principal and interest payment would be approximately $1,796.

Now let’s say you were to move across the street into a new home with the same $400,000 mortgage but with an interest rate of 7%. Your principal and interest payment would jump $865 to roughly $2,661. That’s an increase of nearly 50% to your monthly payment.

Numbers like these illustrate just how heavily discouraged many homeowners may be about selling and is a significant reason behind the persistently low inventory of homes available to buyers.

The lock-in effect is showing signs of easing

Fortunately, the grip of the lock-in effect is showing signs of loosening, evidenced by new listings – a measure of sellers putting their homes up for sale.

The share of “locked-in owners” is down 3 percentage points from last year. New homes listed for sale have gone up 10.4% as compared to one year ago. That makes 25 straight weeks where there were more homes listed for sale versus the prior year, giving homebuyers more options.

Real estate economists have suggested that homeowners may now be more inclined to enter the housing market, recognizing that high mortgage rates are likely to persist for the foreseeable future.

This increased participation by homeowners is contributing much-needed inventory to the market, which is being supplemented by the emergence of new housing supply. Approximately 1.6 million homes are currently under construction and housing completions hit their highest level in 17 years.

Realtor.com pointed to another interesting fact. Over 80% of surveyed prospective sellers have contemplated selling their homes for the past 1 to 3 years, with the average length of consideration at approximately 2 years. Meanwhile, current seller sentiment indicates that the majority of recent sellers (79%) regret not listing their homes earlier, believing they could have capitalized on a stronger housing market.

This long buildup to listing their homes could be a sign that this year’s sellers are less deterred by market fluctuations.

How today’s homebuyers can buy a house despite high rates and low inventory

While you can’t control the trajectory of home prices and mortgage rates, or the pace of homebuilding, here are a few strategies to help you buy a home in today’s market.

• Consider purchasing a fixer-upper. While fixer-uppers and older, cheaper houses require additional work and renovation loans, they often come without the fierce competition and bidding wars associated with move-in ready homes.
• Look into first-time homebuyer programs. Down payment assistance programs can make homeownership more accessible by providing help with down payments and/or closing costs.
• Explore new construction options. Many homebuilders are offering incentives to buyers, such as reducing interest rates with mortgage buydowns, lowering prices, or helping with closing costs. You might discover that a new home is available at a similar price, or even less, than an existing one.
• Search older listings. When houses sit on the market for an extended period, there’s typically a good reason. Sometimes, it’s due to sellers overestimating the value of their home and setting an excessively high price. Or a property could remain unsold because it is outdated or in need of repair. The longer a home remains on the market, sellers often become more eager to sell them, potentially leading them to accept offers below their initial asking price.
• Broaden your home search parameters. Instead of focusing solely on one area, be open to exploring lesser-known neighborhoods and submarkets. Sometimes, exceptional homes are available at more affordable prices outside urban areas.

Get your financing secured early

The process of obtaining a mortgage can take time. This is especially true if your credit is less-than-perfect, or your income is variable such as someone that’s self-employed or has seasonal employment.

In a low inventory housing market, you don’t want to wait around for financing approval while someone who already has the necessary pre-approval letter swoops in and buys the home of your dreams.

Getting pre-approved is a relatively straightforward process and doesn’t cost anything. Speak with a mortgage lender to check your eligibility today.