The "lock-in effect" and declining housing affordability clash in the U.S.

Tensions rise in the U.S. housing market as affordability declines and the 'lock-in effect' clashes.

The U.S. housing market is currently experiencing an intense conflict between opposing forces. The increase in mortgage rates from 3% to over 6% in 2022 is causing home prices to decrease; this comes after national home prices rose by more than 40% during the Pandemic Housing Boom. The limited number of available homes is causing home prices to rise because many homeowners are hesitant to sell and move to a new home due to the higher mortgage rates they would have to pay.

Housing economists emphasise the importance of considering both forces.

Many potential homebuyers were surprised by the sudden increase in mortgage rates in 2022. This rate rise has reduced their ability to buy homes and made homeownership less affordable. According to the Federal Reserve Bank of Atlanta, housing affordability has reached levels not seen since 2006 due to a significant increase in mortgage rates. The high cost of housing led to a decrease in home prices last autumn, particularly in the expensive Southwest and West Coast markets. The ongoing affordability crisis is causing many potential buyers to be unable to participate in the housing market, reducing demand and causing a decline in home sales.

The housing market currently needs more available homes for sale. The lock-in effect is causing homeowners to be reluctant to sell their properties because they are worried about higher mortgage rates. As a result, there is a need for more existing homes available for sale. Homeowners are holding onto their low-interest mortgages, causing a demand for more available homes for sale. In June 2023, the number of homes listed for sale decreased by 26.2% compared to June 2022, and there was a 28.9% decrease compared to June 2019, according to Realtor.com. The limited number of homes for sale has led to increased competition among buyers, resulting in higher home prices during the first half of the year, typically a busy season for the housing market.

The "lock-in effect" can be understood by looking at the numbers. 91% of people who have taken out a mortgage have an interest rate below 5%. Even more impressively, 70.7% of these borrowers have an interest rate below 4%. Many homeowners find it impractical to sell and buy a new property with mortgage rates as high as 6% or 7%.

The impact of the current situation is not limited to buyers and sellers. Real estate professionals rely on transaction volume for their income and are also experiencing strain. Real estate agents and brokers are facing challenges due to the increasing cost of housing and the limited number of homes available for sale, making it difficult for them to find opportunities to drive sales and earn commissions. The decrease in transaction volumes has negatively affected their financial stability and put some businesses at risk.

Which team will emerge as the winner? The question is whether the strained affordability will cause national home prices to decrease or if the lack of existing inventory will push national prices up.

As reported by firms like Zillow and CoreLogic, national house prices have reached their lowest point. These firms predict that house prices will continue to increase in the coming year. Buyers are forced to pay higher costs due to the limited inventory availability.

According to Moody's Analytics, chief economist Mark Zandi, he has a different perspective. According to him, housing affordability is expected to improve in the coming years because mortgage rates are projected to decrease gradually from approximately 6.5% in 2023 to 5.5% in 2025. Additionally, national house prices are predicted to fall by around 8% from their highest to their lowest point. According to Zandi, the limited supply of homes may be overshadowed by the increasing difficulty for buyers to afford them.

According to Zandi, there is a projected decline in prices over the next three years. He emphasises that this decline will not happen suddenly but gradually over time if his team is wrong and prices end up being more robust than expected, it would be because people are choosing to stay put, and there is a shortage of houses available, causing prices to rise.