February 18, 2025
There is no doubt about the fact that higher interest rates are putting a cap on potential growth in the real estate market. Together with high housing prices, affordability has certainly been a major factor within the sector for a few years now. While you can understand market analysts and participants in the industry rooting for interest rates to decrease, you don’t see many calls for home prices to fall. Those who own real estate are really happy that prices are higher, unless they are in the market to sell and purchase another home using financing.
As a matter of fact, we have been talking about the lock-in effect of today’s owners for some time now. That is, owners who want to sell but won’t because of higher interest rates and/or home prices. If you own a home with a 3.0% mortgage, one can understand the disincentive to purchase another when rates are at 6-7%. But over time, these disincentives are fading even without rates coming down. Why? There are several reasons, including the fact that higher rates are becoming old news. The shock factor has faded. At the beginning of this cycle, most everyone was predicting a quick return to lower mortgage rates. Not as low as three percent, but lower than today’s rates.
Another reason? Life goes on. People take jobs in other cities. Their households grow or shrink. They need to move closer to family or to a retirement location. As life goes on, the number of owners who have completely paid off their mortgage or have a mortgage higher than 5.0% grows. This category accounts for well over 50% of owners and grows every month. Thus, the lock-in effect wanes over time due to these factors. Finally, the hope that interest rates will fall has faded somewhat, but it has not disappeared. It has just moved down the road a piece.
Source: Origination Pro
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