Housing 'lock-in' effect could last for years, warns Bank of America
The housing "lock-in" effect has rapidly become the nemesis of anyone with a mortgage, as it essentially dissuades many of them from moving house.
Why? Because borrowers are keen to avoid seeing their monthly repayments rise further at a time when the cost-of-living crisis continues to bite.
All of this subsequently has a knock-on impact on the number of properties on the market—and with fewer people moving up the housing ladder, it can make starter homes scarce.
There had been hopes that the lock-in effect would be fleeting, and one that would fade as interest rates fall in response to cooling inflation.
But according to a new research note by Bank of America, the phenomenon could end up having a lasting impact that potentially stretches into the next decade.
The reason why is pretty simple.
Many forward-thinking homeowners leapt upon home loans boasting miniscule interest rates during the Covid pandemic, as it helped to drive down their costs.
And even if the average 30-year, fixed-rate mortgage does fall from its current level of 6.95%, it'll still be substantially higher than the deals borrowers locked in years ago.
"The wide gap between current mortgage rates and effective mortgage rates means most homeowners are unwilling to move unless forced," Bank of America warned.
And urging consumers to manage their expectations when the Fed eventually does start cutting its target rate—potentially later this year—it predicted that any easing might not move the dial too much when it comes to the cost of a mortgage.
A challenging climate
An unusual quirk in the U.S. property market is largely to blame here.
In other countries like the U.K. and Canada, it's possible to "port" a mortgage—meaning a home loan travels with you when moving from one house to another.
But exceedingly few lenders offer such a service in America, meaning those who decide to upgrade or downgrade their living space would need to relinquish their current rate.
This is exceedingly bad news for the vast majority of homebuyers in the U.S.
According to figures from Realtor.com, 22.2% of mortgages nationwide have an interest rate below 3%—with 35.9% of home loans on a deal somewhere between 3% and 4%.
For someone who owes $400,000, the difference between 3% and 6.95% would be astronomical on a 30-year deal—increasing monthly payments by close to $1,000.
"The US housing market is stuck, and we are not convinced it will become unstuck anytime soon," Bank of America added.
There are some signs that homeowners are getting impatient, and deciding to take heightened borrowing costs on the chin.
Figures from ICE Mortgage Monitor show 24% of mortgage holders had interest rates above 5% back in May, compared with 10% two years earlier.
ICE vice president of research and analysis Andy Walden went on to argue that even a slight reduction in rates could spur a new wave of activity in the property market.
"The concentration of active loans just below 7% has more to do with borrower psychology than concrete savings. There’s clearly something appealing in today’s market for a homeowner to see a 6-handle in front of their mortgage rate," he said.