A Mortgage ‘Lock-In’ Effect Is Driving Up New-Home Demand

Mortgage rates are hovering around a two-decade peak, but a supply-and-demand imbalance is preventing prices from falling, and housing experts aren’t certain where the market is headed next. Along with deterring new buyers, elevated interest rates are also preventing current homeowners from putting their houses on the market. According to Insider, nearly one-quarter of all homeowners are holding onto a mortgage rate of less than 3%, close to the highest amount on record.

Still, that lock-in effect isn’t entirely freezing the for-sale market. Rather than waiting for new listings to appear, buyers are instead turning to new construction. 

[Jacob] Channel says it's possible that demand could recover sharply if mortgage rates were to fall to around 5%, but that could also spur another jump in home prices as buyers rush back into the market. Lower rates could also unlock more inventory as homeowners come off the sidelines. 

"On one hand, more demand puts upward pressure on home prices," he said. "But housing supply has decreased significantly, and that's also because it's become more costly to build and harder to get materials. But now supply chains are better and raw materials are decreasing in price. So we have two possible forces — demand could come back as rates decline, and supply could improve as building comes back."

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