BAM Key Details:

  • According to a new Redfin report, fewer American homeowners have mortgage rates below 6% as of Q3 2023, compared to 2022. 
  • On a recent Hot Sheet, Tom Toole discussed the impact of the lock-in effect—and what to focus on when helping consumers move. 

A new Redfin report shines a spotlight on the diminishing power of the lock-in effect for today’s homeowners. 

As of the third quarter of 2023, fewer Americans are locked into mortgage rates below 6%. And a recent Tweet by Steve Harney offered plausible reasons why homeowners might be more willing to overlook mortgage rates, even while they remain above 6.5%. 

On last Friday’s Hot Sheet, Tom Toole went over the Redfin report and Harney’s Tweet to provide a snapshot of the current market as it relates to mortgage rates and pent-up demand. 

Here’s what you need to know. 

Fewer American homeowners are locked into rates below 6%

Nearly 9 in 10 American homeowners (88.5%) have mortgage rates below 6% as of Q3 2023 (the most recent quarter for which this data is available), compared to a record 92.8% in 2022. 

Redfin-Lock-in-effect-Q3-2023

Source: Redfin

That drop in the share of homeowners locked into lower rates is partly due to those who gave up on waiting to move until rates plummeted—or who had an overriding reason to sell even while rates remained well above 6%. 

For most people, it’s just not realistic to stay where they are forever. Life happens. And by that, we usually mean one of the following life events:

  • Death (a death in the family resulting in the need to move and/or sell)
  • Divorce (a division of the family resulting in the need to move and/or sell)
  • Diploma (graduation and a job search…) 
  • Diamonds (marriage/committed relationship resulting in the need for a home to share)
  • Diapers (family growth resulting in the need for a larger home)
  • Downsizing (empty nest, etc.) 

So, while it might initially make sense to wait until rates are lower, no one can guarantee that waiting will always be an option—let alone the best option. 

Whatever the reason, more homeowners decided to make a move from Q3 2022 to Q3 2023, even when it meant giving up a much lower mortgage rate. 

Another reason for that drop in locked-in homeowners? Everyone, repeat buyers and first-time buyers alike, who bought a home in the last 12 months was transacting during a time when the average mortgage rate was above 6%. 

That’s according to Redfin’s analysis of data from the Federal Housing Finance Agency’s (FHFA) National Mortgage Database for the third quarter of 2023. 

It’s also worth mentioning that, for some, the increase in their home equity during the pandemic helped close the affordability gap, helping them justify selling and buying another home with a higher mortgage rate—especially if they’re downsizing or moving to a more affordable area. 

The lock-in effect still contributes to the housing shortage, but listings are ticking up

Across the country, Americans still have a shortage of for-sale housing to choose from, and one of the top reasons for that is the lock-in effect. With around 90% of homeowners waiting for rates to go down, inventory sank to record lows. 

But starting last year, for-sale home listings have been ticking up, partly because some homeowners had to move sooner rather than later. 

Listings are also on the up because mortgage rates have dropped enough to incentivize some homeowners to bite the bullet and let go of their lower rate. 

Today’s average rate of 6.69% is down from last October’s peak of about 8%. 

Seattle Redfin agent David Palmer is just one agent noticing the shift among homeowners in his market. 

Sellers have started coming out of the woodwork because that’s typical for January and because mortgage rates have dropped. They’re also coming to terms with the fact that rates aren’t going back down to 3% any time soon, which makes it easier to pull the trigger on selling. But a lot of sellers are worried about finding their next house because even though listings are rising, there’s still a housing shortage. That’s part of the reason so many sellers remain on the sidelines.

David Palmer

Redfin Premier real estate agent in Seattle, WA

Here’s where today’s homeowners fall on the mortgage rate spectrum: 

  • Below 6%: 88.5% of mortgaged U.S. homeowners have a rate below 6%, down from a record high of 92.8% in Q2 of 2022.
  • Below 5%: 78.7% have a rate below 5%, down from a record 85.6% in Q1 2022.
  • Below 4%: 59.4% have a rate below 4%, down from a record 65.3% in Q1 2022.
  • Below 3%: 22.6% have a rate below 3%, down from a record 24.6% in Q1 2022.

Buying & selling is still more expensive than it was a year ago

Mortgage rates have gone down, but rates and home prices are both higher today than they were a year ago, meaning it’s still more expensive to buy and sell homes than it was at the same time last year. 

The typical buyer purchasing a median-priced home with today’s average mortgage rate would take on a monthly payment of $2,399—more than $300 below the all-time high reached in 2022 but still 7.4% more than they would have paid a year ago. 

Nearly all U.S. homeowners with a mortgage are sitting on mortgage rates below today’s average. But the difference in monthly mortgage payments varies from one homeowner to the next, depending on individual circumstances. 

A homeowner with a mortgage rate between 3% and 4% is more likely to feel locked-in than someone with a 5% to 6% rate. 

That said, homeowners who were deterred by the lock-in effect a year ago may have a more compelling reason to move compared to last January. 

In a recent Tweet, Steve Harney called attention to the massive accumulation of pent-up demand over the past 18 months due to high mortgage rates. He acknowledged the lock-in effect while also highlighting real-life scenarios in which previously-deterred homeowners are likely to make a move in spite of mortgage rates remaining well above 6%. 

Tom summed up his response to this in the following recommendation: 

Focus less on the rate and more on the monthly payment. I get it, rates are higher. And there are going to be some people who say, ‘I’m waiting for rates to come down.’ You want to respond to that with, ‘How certain are you that rates will be lower later in the year?’ Because most of the projections that we see are in the low-6%, high-5% range… It’s really about the monthly payment. The way people buy homes is [about] how much cash to close and what’s their payment going to be.

Tom Toole

So, a better approach to take with potential clients is “Tell me what payment you’re comfortable with, and let’s look for options that fit that monthly payment.” 

Once you get clear on why someone is thinking about buying or selling—what it would do for them—and what they can comfortably afford, you can get to work finding the best options for them in today’s market. 

Because if they’re reaching out to a real estate agent, chances are they’re hoping they won’t have to wait another year to buy or sell.