The “blocking effect” diminishes. Here’s what it means for the real estate market

Homeowners are starting to give up on waiting for lower mortgage rates. This could be good news for potential home buyers.

In the first quarter of this year, six in seven homeowners, or 86%, have a mortgage rate below 6%, according to a Redfin analysis of the Federal Housing Finance Agency’s national mortgage database released Tuesday. This is down from a record high of 93% in the second quarter of 2022, a sign that the lock-in effect is easing.

And that’s true at every mortgage rate level. The share of homeowners who have kept their current mortgages has fallen over the past two years – even for those with rates below 3%.

The so-called “lock-in effect” refers to homeowners choosing to stay in their homes to keep their mortgage rates lower when they might otherwise have considered a move. Much of this was caused by historically low rates at the height of the pandemic in 2020 and 2021, when they fell below 3%.

Since then, mortgage rates have more than doubled, prompting many homeowners to stay put in anticipation of lower rates and a friendlier housing market. The average interest rate for a 30-year fixed mortgage is currently 6.46%, according to government-sponsored mortgage provider Freddie Mac (FMCC).

This has left potential home buyers with fewer and fewer options. Last month, new records arrived the lowest level in a yearaccording to Redfin (RDFN).

“I have about a dozen owners who would like to sell but aren’t willing to give up the 3% interest rate for one that’s more than twice that,” Blakely Minton, a Redfin (RDFN) Premier real estate agent in Philadelphia, said in a statement. “Many of these sellers will list if rates go back to 5%.”

As a result, the lock-in effect has contributed to the US housing shortage, which is estimated to be between 4 and 7 million homes. Insufficient supply is also pushing home prices, which have continued to rise each month. The average sales price reached $439,455 in July, up 4.1% year-over-year.

However, this phenomenon seems to be slowly but surely weakening its grip on the market. More and more homeowners are biting the bullet and giving up on their low rates, largely out of necessity, according to Redfin. Major life events such as a job change or divorce give people no choice but to list their homes, regardless of rates.

And with mortgage rates finally starting to have a downward trendthe “lock-in” effect could be easing at a faster rate than we’ve seen in the last couple of years. That said, there’s still a ways to go before Americans feel comfortable making the leap: Only 2% of homeowners polled by Bankrate in June they said they would buy a home this year with a mortgage rate of 6% or higher.

Meanwhile, 47 percent said mortgage rates would need to be below 5 percent for them to feel comfortable buying a home this year, and 38 percent said they were looking for rates below 4 percent.

While many dream of a return to pandemic-era rates, Bankrate Chief Financial Analyst Greg McBride warned homeowners not to hold their breath.

“Hopes for lower interest rates need a reality check that ‘down’ doesn’t mean we’re going back to 3% mortgage rates,” he said.