Economic Insights — Historically, housing sales decline when interest rates go up, but sales have dropped more than expected since the current cycle of interest rate hikes began in early 2022. Mortgage lock-in may explain why.
The slowdown in housing sales is greater than what is predicted by past research into the link between home purchases and interest rates. Mortgage lock-in explains much of this gap. That is, for a large share of borrowers today, moving would entail giving up a substantial benefit in the form of their low-rate mortgage. Mortgage lock-in can have additional real consequences. But we might be able to alleviate these consequences through relatively inexpensive changes to mortgage contracts. This could be particularly important if lock-in’s impact on low- and moderate-income households is significant.
This article appeared in the Second Quarter 2024 edition of Economic Insights. Download and read the full issue.
