A new report has revealed just how reluctant homeowners are to sell due to the attractiveness of their current mortgage rates.
The April ICE Mortgage Monitor report found that, on average, a homeowner’s payment would more than double if they traded up to a home just 25% more expensive.
“After American mortgage holders secured some of the lowest first lien rates ever and benefited from record home price growth on top of that, we wanted to quantify just how locked-in folks truly are and what kind of rate declines would be needed to shake some of that inventory loose,” said Andy Walden, vice president of enterprise research strategy at ICE.
Even moving into a similarly priced home across the street would mean a 40% average jump in principal and interest payments – about $500 extra per month – according to Walden. This “lock-in effect” heavily discourages homeowners from selling and is a significant reason behind the persistently low inventory of homes for sale.
“You’d be hard-pressed to find a more vivid illustration of the lock-in effect that’s kept for-sale inventory in a hole for the last few years,” Walden said in the report. “Lower rates would ease the calculation for many and make moves more reasonable. But the net result continues to be too few homes for too many buyers. Until that fundamental mismatch is addressed, simple supply and demand will continue to press on both inventory and affordability.”
While inventory levels saw a slight uptick in February 2024, they remain 40% lower than pre-pandemic averages. More tellingly, 60 major US markets had more homes for sale in February 2024 than in the same month a year prior, suggesting some relief may be on the horizon.
“After closing out 2023 at an 11-year low, home sales have begun to improve over the last two months,” Walden noted. “In fact, lower interest rates in late Q4 and early Q1 led to February home sales hitting their highest adjusted level since March 2023. With sales rising and inventory still tight, months of supply edged slightly lower in February, continuing to provide a floor for home prices. Our February ICE Home Price Index showed strength in that regard, with adjusted home prices rising by +0.43%, up from +0.33% in January, equivalent to a +5.3% seasonally adjusted annualized rate. Keep in mind that SAAR had fallen below 1% as recently as five months ago.”
The lock-in effect is most pronounced in high-cost California markets (Los Angeles, San Diego, San Francisco and San Jose), where homeowners may face payment increases of over 140% for a modestly larger home.
“Mortgage rates need to come down to dislodge the lock-in effect,” said Walden. “Since most factors influencing 30-year rates are out of lenders’ control, they need to be able to find ways to compress spreads without simultaneously compressing their own profit margins. That’s key to our mission at ICE – identifying and eliminating inefficiencies in housing finance through technology while finding smarter, faster, cheaper and more transparent ways to originate loans and increase liquidity.”