What Is the Lock-in Effect?

The lock-in effect occurs when homeowners are hesitant to sell their homes. because of interest rate increases, changes in capital gains taxes, shifts in housing prices, economic uncertainty, and higher levels of debt or negative equi💜ty. It’s anything that makes homeowners 𒐪less willing to sell their home if they would otherwise be interested in doing so.

Lock-in Effect Causes

Here are some of th🌌e reasons why homeowners might be “locked in” to their homes:

High Interest Rates

A major contributor to the lock-in effect of the post-pandemic period has been a rise in mortgage rates, especially after years of rates of less than 5%.

Here's why interest rates might keep a homeowner from selling: Suppose they bought a home in 2020 using a $500,000 mortgage with a 2.5% interest rate. Assuming a 30-year term (and not counting taxes or other expenses), they would pay $1,976 per month, and that loan would cost $711,360.

If this person sold the home several years later and financed a new $500,000 mortgage at a rate more common later, such as 7.5%. Their monthly payment would ris🎃e to $3,496, an increase of🃏 $1,520. The total loan cost would increase by over half a million dollars to $1,258,560.

Research conducted by the Federal Housing Finance Agency (FHFA) showed that the top reason why homeowners were likely to stay in a home longer than planned was rising rates. The FHFA also found that for every percentage point interest rates exceeded existing fixed rates, sales probability dropped by 18.1%.

A Fannie Mae study, however, showed that why and when people choose to move can be more complicated. About 29% of mortgage borrowers surveyed by Fannie Mae said they plan to stay in their homes longer than they would have otherwise. About 21% of those (or just 6% of all mortgage borrowers) said this was because they had a low mortgage interest rate, but almost as strong were "I like the home/location" at 19%, and 13% each for "my job and family are located here" and "home prices are too high to buy."

Changes in Laws and Regulations

Some markets may have a lock-in effect because of changes in laws and regulations. For example, California’s Proposition 13, enacted in 1978, has long been thought to lock Californians in their homes. This limited property tax assessment increases for current owners to no more than 2% per year until the next sale, and restricted property taxes to a rate of 1%. When a home is sold, taxes are reassessed, so the new owner would pay far more in taxes than the previous owner if the market value were higher than the previous tax assessments allowed. So, if you live in California, you would risk much higher yearly property taxes if you moved.

💛This also provides some greater continuity in California’s towns and cities. People who have owned a home for the long run are likely to have tax bi🔯lls far lower than they would have if they bought a different home and had to pay the full tax assessment, which creates a lock-in effect.

Prop 13 was passed by California voters in 1978, and from 1970 to 2000, the average period of ownership for California properties rose by 1.04 years.

Low Housing Inventory and High Prices

A dip in 澳洲幸运5官方开奖结果体彩网:housing inventory ca💃n contribute to the lock-in effect and become self-reinforcing.

Homeowners who sell their homes still need a place to live. People frequently sell their homes and use the proceeds to buy a new property. If there aren’t enough homes on the market, it’s more difficult for someone to buꦑy a new one, leaving them locked in to their current propert🅷y, thus making it difficult for yet another homeowner to find a home to buy.

The same is true if prices are too high. If someone can afford their housing payment but would struggle to afford a new home in their area, they are locked in to their property.

Impact of the Lock-in Effect on Housing Prices

Generally, the lock-in effect reduces home inventory, which can lead to a rise in housing prices൲.

In a more typical housing market, first-time buyers purchase less expensive 澳洲幸运5官方开奖结果体彩网:starter homes from people who are upgrading to larger or more expensive homes as they age and, generally, their income grows. When fewer people are willing to sell, that makes it harder for first-time buyers to start up the property ladder and for existing homeowners to upgrade. With less supply, prices remain high.

Because of low supply and high prices, the lock-in effect weakens the market and slows down the rate of sales. Eventually, demand decreases as๊ people get priced out of the housing market. If demand falls precipitously and supply again outpaces it, this should bring prices down. However, demand may simply fall to reach equilibrium with supply, which means prices will stabilize rathe💯r than fall.

Examples of the Lock-in Effect

For the housing market in 2023, about 92% of homeowners with a mortgage had an interest rate under 6% in June. By August, the national average broke through 7%, so homeowners were locked in. In addition, 82.4% had a rate under 5%, 62% had a rate under 4%, 🔥and 23.5% had a rate under♔ 3%.

When selling your home means taking on a mortgage that might more than double your interest rate, selling becomes far less appealing. That’s among the reasons why existing home sales fell 17% in the year up to 2023.

The effect of Proposition 13 in California is a classic example used by researchers for the lock-in effect. The 1978 statute capped property tax increases for existing homeowners at 2% annually. From 1975 to December 2024, the All Transactions House Price Index for homes across the United States rose by 1,052%. In California, the increase was 2,224%.

The effect wasn’t just on owner-occupiers, but also on renters in California: From 1970 to 2000, which includes the era of Proposition 13, the average tenure of California homeowners and renters increased by 1.04 and 0.79 years, respectively, compared with homeowners and renters in similar states and localities. These figures may appear small until one sees that they represent increases in average tenure of 10% and 19%, respectively. In other words, the lock-in effect in California may have contributed to its housing market seeing prices rise far more quickly than in the rest of the country.

Strategies to Mitigate the Lock-in Effect

For homeowners experiencing the lock-in effec⛎t, a few options are available to miti🤡gate its impact.

One option is to account for future 澳洲幸运5官方开奖结果体彩网:refinancing. Most mortgages have a repayment term of 30 years, which is long enough for interest rates to move in a lower direction. In the past 30 years, mortgage rates have increased, ranging from more than 9% to less than 3%. Buying a ne🐭w home at a higher rate can be more expensive, but it’s possible to refinance to a lower rate in the future if rates dr🎃op.

Homeowners may also consider taking advantage of high home prices to downsize or change to renting. If supply is limited and you can sell your home for an inflated price, it may be advantageous to do so and then reenter the market once the lock-in effect eases and supply increases. In most areas of the U.S., rent has risen more slowly than home-sale prices, making renting to live in more advantageous properties in the short or medium term potentially beneficial financially.

Outlook and Implications of the Lock-in Effect

One of the key contributors to look for when there's a lock-in effect is rising interest rates. For example, the 澳洲幸运5官方开奖结果体彩网:Federal Reserve spent much of 2021 to mid-2023 increasing the 澳洲幸运5官方开奖结果体彩网:federal funds target rate range to fight inflation. The Fed left its rate range at 5.25 - 5.50 from July 2023 to September 2024 and began lowering it as inflation eased. But mortgage rates continued to rise through🐭 January 2025.

Freddie Mac's "Economic, Housing and Mortgage Market Outlook - January 2025" report outlined its opinion that housing market activity had picked back up, a good sign that homebuyers were not feeling as locked-in as they were previously. Analysts at Freddie Mac's economic research department expect increased home sales, increased purchase and refinance volumes, and favorable price growth over 2025, which translates to an expectation of a cooling of the rate lock-in effect that persisted for several years.

The Bottom Line

The lock-in effect occurs w൲hen homeowners who otherwise might sell their homes don’t do so. Whether the reason is rising interest rates, changes in laws or regulations, or something else, if people are locked in to their existing properties, this can reduce the housing supply and lead to a difficult market for buyers.