Existing home sales fell to their lowest point in almost three decades last year, and a lot of that was because of the so-called lock-in effect. It refers to homeowners who have locked in below-market mortgage rates and refuse to sell when rates are higher. You can imagine why someone with a 3% mortgage rate wouldn’t want to give that up, let alone for an 8% rate.
But mortgage rates have come down since, and the average 30-year fixed rate is 7.11%. But that’s still high compared with the historical lows throughout the pandemic and years before. And while there is some evidence indicating the lock-in effect is easing, Zillow senior economist Orphe Divounguy seems to debunk that.
In February, new listings rose 21% from the same month last year. However, “much of the monthly increase occurred in markets which have a disproportionately higher number of homeowners that aren’t hamstrung by mortgage rate lock-in,” he wrote in an analysis published today.
Metropolitan areas with the highest share of mortgage-free homeowners saw the largest increase in listings, Zillow said. And almost 11 million homeowners don’t have a mortgage and are “mortgage-ready,” according to Zillow, which means they can comfortably afford a new mortgage, even at these rates.
“Unsurprisingly, most of these homeowners belong to older generations, having built equity in their home(s) over the span of many years, and/or those who live in more affordable markets,” Divounguy wrote.
Basically, homeowners who have paid off their mortgage, while their home values appreciated, can afford another home with or without a 7% mortgage rate. You can guess which generations those are. Baby boomers and their predecessors from the silent generation are generally the least affected by changes in mortgage rates. Fourteen percent of homeowners in the silent generation aren’t locked in, and 17% of baby boomers who own their homes (the largest homeowner generation by Zillow’s estimate) are free of the lock-in effect. To compare, only 6% of millennial homeowners don’t have to worry about the lock-in effect, per Zillow.
And it’s metropolitan areas such as Detroit, Cleveland, Oklahoma City, Buffalo, and Pittsburgh where homeowners are the least likely to be affected by changes in rates, according to Zillow. For instance, 27% of homeowners in Pittsburgh are what Zillow calls “free of rate-lock.” In Buffalo, it’s 23%; in Cleveland, it’s 22%.
Meanwhile, in four California cities only 3% of their homeowner populations don’t have to worry about mortgage rates and feeling locked in; those are of course the usual suspects: Los Angeles, San Diego, San Francisco, and San Jose. California is chronically undersupplied, and that’s reflected in remarkably high home prices. The lock-in effect hasn’t helped in the state, or country as a whole.
“Research shows that mortgage rate lock-in led to a 18% reduction in the probability of a home sale for every percentage point that market mortgage rates exceeded a homeowners’ origination mortgage rate, thus preventing roughly 1.33 million transactions between the second quarter of 2022 and the end of 2023,” Divounguy wrote. “The supply reduction increased home prices by 5.7%, even as demand for housing slowed amid very challenging affordability conditions.”
Still, as JPMorgan global market strategist, Stephanie Aliaga, recently said: “Supply is beginning to thaw, with our measure of seasonally adjusted existing homes for sale showing a steady upward trend since last spring.” And as data from the National Association of Realtors shows, existing home sales jumped in February; it was the largest monthly increase in a year.
We’ll see what existing home sales looked like last month soon, but as Fortune has previously reported, this year’s spring shopping and selling season might be more of a mini version of what we’d typically see, because mortgage rates are still high and so are home prices—but incomes haven’t kept up, and we’re missing millions of homes.