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The Lock-In Effect: A Changing Landscape for Home Sales
The so-called “lock-in” effect, which has significantly constrained home supply, is expected to ease by 2025. Danielle Hale, the chief economist at Realtor.com, anticipates that a surge in homeowners listing their properties for sale will occur as various factors come into play, including robust home equity and shifts in personal circumstances.
This year, 2024, has been particularly challenging for homebuyers. Persistent low affordability levels, exacerbated by high home prices and rising mortgage rates, have made the market tough to navigate. Mortgage rates have sharply escalated, reaching approximately 6.8% today, compared to under 3% in 2022. This dramatic increase has created a lock-in scenario where many homeowners are reluctant to sell their homes in a market characterized by higher borrowing costs, further diminishing the inventory of homes available for sale and driving prices upward.
However, the future outlook appears more promising. According to Hale, the US housing market could exhibit more favorable conditions for buyers in 2025, spurred by two significant trends.
Home Equity Gains Could Drive Listings
Many existing homeowners have significantly increased their home equity over the past few years due to rapidly appreciating home values. This wealth accumulation is further supported by ongoing monthly mortgage payments that reduce outstanding mortgage balances. Hale suggests that homeowners with lower mortgage debts may be less concerned about today’s elevated interest rates, making them more likely to sell.
Lawrence Yun, chief economist of the National Association of Realtors, notes that homeowners are feeling financially more secure because of their accumulated home equity. This sense of financial prudence is prompting more listings to appear in the market.
As homeowners consider moves, they can leverage their home equity, which may allow them to purchase their next home outright or with minimal financing. “Utilizing their home equity provides greater flexibility,” Hale states, allowing sellers to act as cash buyers or take out smaller mortgages.
Life Changes and Market Adaptation
Hale also points out that factors extending beyond mortgage rates and home prices play a role in homebuying decisions. As time passes since purchasing their home, homeowners may encounter life changes that necessitate a move, irrespective of current market costs. Large life transitions—such as new job opportunities, retirement, marriage, or the arrival of children—often motivate buyers to relocate.
“People don’t always move due to financial reasons,” Hale emphasizes, outlining how such life-changing events can override concerns about moving costs. Furthermore, as buyers get accustomed to the high-interest-rate environment, the reluctance to sell may diminish. Real estate agents, such as Mimi Trieu from Redfin, indicate that many homeowners may eventually decide to act rather than wait for favorable interest rates.
A Shift Toward a More Buyer-Friendly Market
While changes won’t happen overnight, they are likely to lead to a more buyer-centric housing market. Hale asserts that as the lock-in effect gradually dissipates, an increasing number of property owners will feel confident in putting their homes on the market.
Although lower interest rates and mortgage rates would expedite this transition, Hale believes that even if rates stabilize around 6% in 2025, the lock-in effect will continue to weaken. Hale predicts that the market could experience a significant shift in favor of homebuyers by the end of next year.
“Currently, 84% of homeowners with mortgages have rates below 6%,” Hale highlights. She projects that this percentage will drop to 75% by late 2025, indicating a trend that could further invigorate the housing market.
Source
www.businessinsider.com