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What is the rate lock effect?

What is the rate lock effect
by Brad Cartier, posted in Newsletter

Nicole Friedman of the Wall Street Journal opens us up this week, talking about how homebuilders are busier than ever trying to keep up with the growing demand for housing. “Millions of American homeowners have been reluctant to sell because they can’t afford to give up the low mortgage rates they have now. Only 1.08 million existing homes were for sale or under contract at the end of May, the lowest level for that month in National Association of Realtors data going back to 1999.”

New home construction high

Source: Wall Street Journal (August 2023)

Prospective buyers, though, are getting little relief from the homebuilding revival due to the steady competition, according to Friedman. Similarly, prices have remained elevated nationally even as interest rates rise. This has boosted homebuilder confidence, rising to new yearly highs. “Investors believe the home-building industry—one of the most sensitive to changes in interest rates—has already gone through its recession and is coming out the other side.”

Norah Mulinda of Bloomberg reports on homebuilders, highlighting that the sector has outperformed the S&P 500. “Better pricing, lower lumber costs and shorter cycle times have all supported a gross margin inflection for the industry…Builders that reported in July confirmed margin strength in the second half, with many raising their gross margin outlooks.”

That said, Mulinda reports that the main headwind for builders moving forward will remain land acquisition as prices remain elevated, as well as high construction debt costs.

Bill Conroy of Housing Wire discusses this trend and how homebuilders struggle to keep up with a surge in demand for new homes. This is primarily the result of low resale inventory, as more people are not choosing to list homes for sale due to elevated debt costs.  New home sales were up around 24% in June year-over-year, whereas existing home sales dropped by 19% after declining by 20% in May. This has created what many in the industry call a “rate lock effect,” whereby would-be sellers will not sell due to their currently low rates.


Nicole Friedman of the Wall Street Journal reports that two-thirds of mortgages currently have rates lower than 4%. “The mortgage-rate factor is leaving some people in houses that aren’t a good fit, whether it’s a growing family without enough bedrooms or aging homeowners with too much space, or dissuading people from relocating for jobs or other opportunities. Some people that wanted to sell in 2022 or 2023 shelved their plans.”

Most people have rates below 3%

Source: Wall Street Journal (August 2023)

Dana Anderson of Redfin reports that the average U.S. home buyer’s monthly mortgage payment hit $2,605 in July, up 19% year-over-year and down slightly ($32) from June’s all-time high. “Home prices are increasing because of the mismatch between supply and demand. High mortgage rates have pushed many would-be sellers out of the market, with homeowners hanging onto their relatively low rates. The total number of homes for sale is down 19%, the biggest drop in a year and a half, and new listings are down 21%.”

Treva Tam of Zillow reports on rate-locked homeowners, highlighting that homeowners with lower rates choose not to move or sell their properties, creating further strain on resale supply. According to its survey, Zillow found that as of June, mortgage holders with rates higher than 5% were twice as likely to have plans to sell than those with lower rates. 

People wont move

Source: Zillow (August 2023)

“Even though this locked mortgage effect may not be a direct experience for first-time homebuyers, current homeowners’ reluctance to sell does have a direct impact on the housing supply. When homeowners with low mortgage rates are hesitant to sell their homes, it results in a shortage of housing options, resale supply, homeowner mobility, and places upward pressure on housing prices.”

In addition to all this, David Logan of the National Association of Home Builders (NAHB) reports that lenders are increasingly tightening their lending standards, further adding to reasons not to get a new mortgage for would-be home sellers. In a recent survey, banks reported tightening lending standards across all mortgage products, except for subprime loans.

Labor market

Lucia Mutikani of Reuters reports on recent labor market data showing that the U.S. added fewer jobs than expected in July; however, wage gains remained strong and unemployment fell to 3.5%. “The Labor Department’s employment report on Friday also showed job gains in May and June were revised lower, potentially suggesting demand for labor was slowing in the wake of the Federal Reserve’s hefty interest rate hikes.”

Danielle Hale of reports on this data, highlighting that “still healthy, the labor market showed further signs of cooling, with job gains of 187,000 coming in lower than both the 278,000 monthly average for the first half of 2023 and the 399,000 average of 2022.”

Labor market is slowing

Source: (August 2023)

“Economic data, including today’s job report figures, suggests that conditions are still favorable for households, which should provide a nice boost for housing demand. However, mortgage rates are climbing again, nearing previous 20-year highs and more than offsetting the benefit of any dip in home listing or selling prices.”

Logan Mohtashami of Housing Wire jumps into the conversation, noting that interest rates dropped on the news of a cooling labor market. The next big test will be the release of tomorrow’s Consumer Price Index report, which will be another market-mover for mortgage rates.

Finally, Fergal McAlinden of MPA reports on the slowing labor market, highlighting that this is the slowest two months of job growth since the beginning of the pandemic. One of the bright spots in the labor data was that construction added more jobs than most other sectors, providing much-needed labor relief for the high demand for new homes.

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