The housing market is experiencing a stagnation in homeowner mobility due to high and rising home prices coupled with elevated interest rates, according to Riordan Frost, senior research analyst, Harvard Joint Center for Housing Studies, in a recent blog post. Despite abundant home equity, homeowners are hesitant to sell and move due to a "lock-in effect" created by current mortgage rates being double what they were in 2021. This situation is reminiscent of the 1980s when a similar effect occurred due to a spike in mortgage rates. The prevailing 30-year mortgage rate has risen to 7.22%, more than double the 3.1% rate in late 2021. The lock-in effect is estimated to require a net financial gain of at least $55,000 to justify moving to market interest rates.
HOMEOWNER MOBILITY FELL AS INTEREST RATES SPIKED
The drop in homeowner mobility by a full percentage point from 2022 to 2023, comparable to the Great Recession, is attributed to this lock-in effect. The high interest rates are dissuading potential homebuyers, exacerbating the shortage of for-sale inventory. This lack of mobility could lead to inefficiencies in the labor market, hindering relocation to more productive areas. Additionally, it may affect household utility as people are less likely to move despite changing needs, potentially increasing commuting and traffic.
The possibility of a reduction in interest rates or increased housing supply is seen as a potential solution to alleviate the lock-in effect and encourage homeowner mobility. While interest rates have recently declined, they remain higher than when many homeowners secured their mortgages, and further decreases are needed to significantly impact the current situation. In the absence of these changes, low homeowner mobility is expected to persist, contributing to broader negative economic effects.
