The rate lock-in effect that has kept the housing market “stalled” during the past two years appears to be finally loosening, a report from First American finds.
When rates peaked in the fourth quarter of 2023, there was a 3.2-percentage point difference between the average prevailing mortgage rate and the average outstanding mortgage rate.
However, mortgage rates have decreased since then. Perhaps more importantly, life events have resulted in at least some homeowners needing to purchase new homes and move on. As a result, more homeowners and potential purchasers have acclimated themselves to the higher rate environment.
This means the housing market is looking a little better now than it was two years ago.
“The good news is that due to a combination of lower mortgage rates and a steadily increasing share of people buying homes at higher mortgage rates, the rate lock-in effect has loosened,” says Odeta Kushi, deputy chief economist for First American, in the report. “In the second quarter of 2022, nearly 93 percent of mortgaged homes had a rate below 6 percent. According to fourth quarter 2024 NMDB data, that share is down to 82 percent. In the fourth quarter of 2024, the average interest rate on outstanding mortgages was 4.3 percent, while the average prevailing mortgage rate was 6.6 percent – a difference of 2.3 percentage points.”
As Kushi explains, even slightly looser handcuffs can help unlock the housing market.
“Lifestyle reasons, such as the five D’s – diplomas, diapers, divorce, downsizing and death – can trigger existing homeowners to sell, even if it means losing their low mortgage rate,” she says. “Additionally, existing homeowners are sitting on significant equity cushions, which allow them to partially offset higher mortgage rates with larger down payments. However, the housing market will continue to be held back by affordability constraints and economic uncertainty. Nevertheless, while not the only factor affecting market potential, the housing handcuffs have loosened for now. Welcome news for a housing market that has struggled to gain momentum in recent years.”
The modest positive momentum suggests that the housing market is entering the spring buying season in a stronger position compared to a year ago, although it remains significantly below pre-pandemic levels.
Photo: Hussain Badshah