The lock-in effect—the gap between existing mortgage payments and the cost of financing a home today—continues to widely affect housing supply and is “trapping” homeowners into staying where they are, according to new data from Realtor.com®.
The new Realtor.com report details how a homeowner wishing to move but locked-in at a lower mortgage rate can face a 73.2% increase in mortgage payments, essentially “trapping” them into their homes and preventing any moves.
Breaking it down, a homeowner with a lower rate is typically paying $1,300 in principal and interest a month with current rates usually under 4.5%, but if they were to sell their house and move, their monthly payment would jump to nearly $2,236 with a new mortgage rate typically in the 6% range.
This leap in monthly costs during a time of financial hardship for many across the nation—due to continued historically higher levels of inflation—exacerbates the issue of supply in the housing market, preventing the entrance of more existing homes.
As Danielle Hale, Realtor.com’s chief economist, stated, “The lock-in effect isn’t just theoretical; it’s a significant factor weighing on the decisions of American homeowners.”
“When the average mortgage holder is staring down a $1,000-a-month cost increase just to move, that requires incredible budget flexibility that many households simply cannot manage and others choose not to take on,” she continued. “The ultra-low rates of 2020-2021 have become golden handcuffs, starving many local housing markets of much needed supply.”
Taking a look more regionally, Realtor.com found that even in lower priced markets, the lock-in effect remains a problem as there are still jumps in monthly costs upon moving.
Even for the lowest gaps in monthly payments before and after a move, the increase is still upwards of 30%:
- Pittsburgh, Pennsylvania: $995 monthly payment before moving, after a move would increase 32.5% to $1,318
- Baltimore, Maryland: $1,505 before moving, afterward would increase 34% to $2,016
- Buffalo, New York: $1,046 before moving, afterward would increase 34.8% to $1,410
The highest gaps in the affordable sector even approach a 50% increase in monthly payments:
- Birmingham, Alabama: $1,075 monthly payment before moving, after a move would increase 47% to $1,581
- Dayton-Kettering-Beavercreek, Ohio: $902 before moving, afterward would increase 48% to $1,335
Hannah Jones, senior economic research Analyst at Realtor.com, explained that while more affordable markets have smaller gaps in monthly payments, “they weren’t spared by rising rates, they simply started from a less locked-in position.”
“Crucially, many owners in these areas hold higher-rate mortgages, meaning fewer are clinging to those extremely low rates,” she continued. “Their penalty for selling is smaller, but the cost of mobility is still high everywhere.”
The less affordable markets, on the other hand, remain the most burdened by the lock-in effect as they are faced with staggering gaps in monthly costs upon moving, all surpassing 100%. Four of these markets are in California, the highest in the state (and overall) being the San Jose metro region, with a $2,604 monthly payment before moving, which after a move would increase 179.6% to $7,281.
Other high priced metro areas with large gaps include:
- Portland, Maine: $1,297 before moving, afterward would increase 154.8% to $3,305
- Bridgeport-Stamford-Danbury, Connecticut: $1,696 before moving, afterward would increase 148.5% to $4,214
- Boston, Massachusetts: $1,857 before moving, afterward would increase 127% to $4,216
In terms of beating the lock-in effect, Realtor.com surmised that homeowners looking to move must rely on “financial strategy,” such as renting out their house rather than selling it, downsizing to a smaller, more affordable home or relocating to a more affordable area altogether.
“Unlocking the housing market will require a combination of easing affordability constraints, such as a sustained decline in mortgage rates, stronger income growth, or slower home-price appreciation, and perhaps most importantly, time,” the report concluded.
