When Homeowners Are 'Locked In,' Buyers Get Priced Out

Key Takeaways

• New research examines the mortgage rate “lock-in” effect that kept home prices rising along with mortgage rates after the pandemic.
• Homeowners with ultra-low pandemic-era mortgages who would have otherwise become renters stayed in their homes instead. That kept a big chunk of the housing supply off the market and elevated prices.
• The effect only happened in markets where there weren’t enough homes being built.

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When mortgage rates rise, home prices usually go down. But the exact opposite happened when interest rates climbed after the pandemic, and new research sheds light on how and why.

Normally, higher interest rates push prices down because buyers drop out of the market, reducing demand. But the economy was anything but normal in 2021, and a new paper by Justin Katz, a research fellow at the Harvard Joint Center for Housing Studies, examines how and where the “lock-in” effect kept prices soaring even as mortgage rates rose. It turns out renters played a major role in the phenomenon.

Mortgage rates began to rise in 2021 after years of rock-bottom rates, climbing to more than 7% from under 3% in just two years. Because rates were so low for so long during the pandemic, millions of homeowners had rock-bottom mortgage rates, giving them a huge financial incentive not to sell their homes. With fewer houses on the market, the supply-and-demand equation was tilted in favor of sellers, and prices continued to rise.

What This Means For The Economy

This research underscores that policies aimed at boosting housing supply are more likely to ease affordability pressures and stabilize a key sector of the U.S. economy.

Katz’s research tackles a potential hole in that notion: wouldn’t those same locked-in homeowners have become homebuyers too? So why didn’t demand fall alongside supply, and push prices down?

The answer, Katz found, lay with the turnover between homeowners and renters. The renter-to-homeowner path isn’t a one-way street. Every year, a large percentage of home sellers choose to rent their next residence, freeing up housing inventory. In September, for example, 36% of home sellers planned to rent their next home, according to Fannie Mae. The lock-in effect froze that would-be inventory in place.

“If rate lock reduces moves by owners who would have otherwise exited to the rental market, the overall supply of owner-occupied homes declines, increasing house prices relative to rents,” Katz wrote.

Related Education

Understanding the Lock-in Effect: How It Affects House Prices

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Altogether, the lock-in effect accounted for 40% of the difference between where home prices were expected to be and how they actually played out between 2021 and 2023.

Moreover, Katz found that the effect occurred only in areas where not enough homes were being built. That has implications for what policies the government should pursue to make housing more affordable.

“Policies to improve housing affordability should focus on expanding housing supply,” he wrote. “By contrast, policy interventions that affect home sales choices by changing mortgage structure, such as portability, would have little impact on aggregate house prices.”

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