You’ve heard of golden handcuffs. That’s when a company compensates you generously to discourage you from taking a job elsewhere.
Some of us restrain ourselves with another type of golden handcuffs: low mortgage rates. Economists dub the phenomenon the “rate lock-in effect.” They say rate lock-in happens when we lash ourselves to the low mortgage rates we got when we bought or refinanced our homes.
So we stay put, even when we long to move up, downsize or relocate.
Rate lock-in is not victimless (and is not the same thing as “locking” an interest rate before closing on a mortgage). It keeps properties off the market at a time when demand for homes exceeds the paltry supply, causing prices to skyrocket and promoting ruthless competition. First-time home buyers are especially disadvantaged because they don’t have equity to convert to down payments.
An effect that’s difficult to quantify
But does rate lock-in really exist? And how many moves does it prevent? Economists have pondered the subject for more than 40 years.
You don’t need a Ph.D. in economics to see that someone who got a 9% mortgage rate in 1974 would look askance at selling and then buying a house seven years later when rates were 18%. But what about smaller increases in interest rates? In a 1987 paper in The Review of Economics and Statistics, John M. Quigley of the University of California, Berkeley argued that a 35-year-old homeowner with a fixed-rate mortgage at 10% would have a 50% probability of moving after eight years if rates stayed at 10%. However, at 12% rates, the chance of that homeowner moving after eight years would drop to less than 40%; and to 30% if rates went to 14%.
Research by Quigley and others in the 2000s and 2010s found more evidence of the lock-in effect, but scholars disagreed on how big of a deal it is. Rate lock-in is difficult to measure because people choose to move or stay for multiple, layered reasons. And hardly anyone pays it attention until there’s an abrupt rise in mortgage rates.
Fixing up instead of moving on
Housing economists are thinking about rate lock-in now. They believe fast-rising interest rates may be keeping homes off the market.
- The 30-year mortgage rate zoomed up more than two percentage points in the first five months of the year, from 3.22% at the beginning of January to 5.27% at the beginning of May, according to Freddie Mac.
- Meanwhile, just 950,000 homes were for sale at the end of March, according to the latest data from the National Association of Realtors. Compare that with March 2019, a time of relatively stable rates before the pandemic, with an inventory of 1.67 million homes for sale.
In April, I asked some housing economists about the effect of materials shortages on home construction. After answering those questions, they brought up the golden handcuffs.
“The ‘lock-in effect’ should be a serious consideration when trying to determine how inventory progresses,” Ali Wolf, chief economist for Zonda, a housing market research platform, wrote in an email.
Skylar Olsen, principal economist for online mortgage lender Tomo, described a scenario in which aging baby boomers may have taken advantage of low rates to borrow against their equity “to remodel the bathroom so it doesn’t have a tub anymore — it’s got a shower you can walk into.” Under this explanation, boomers remained in their renovated homes instead of selling to Gen Xers and millennials.
The low-rate refinancing boom in 2020 and 2021 “was an incredible opportunity to lower and fix your cost, and I think interest rate lock-in might actually be powerful,” Olsen told me.
Moving requires ‘a need and a push’
Michelle Doherty, an agent with RLAH Real Estate in northern Virginia, says “there has to be a need and a push” to persuade home buyers to give up low mortgage rates they got any time from late 2019 to early 2022. “It has to be either your job is moving you, the military is moving you, or you’ve outgrown that home,” she says.
A similar thought is expressed by Jodi Hall, president of Nationwide Mortgage Bankers, an online lender. Having a low mortgage rate is not “going to keep people from moving if they have decided that they have a need to buy a new house in a different area, a larger home, or whatever it may be,” she says.
Hall and Doherty say people are less reluctant to give up low interest rates if they buy a less expensive house where the monthly payment is lower, even if the interest rate is higher.
Furthermore, even as mortgage rates have blasted off, homeowners’ attitudes about selling haven’t changed much. In Fannie Mae’s monthly Home Purchase Sentiment Index, 21% of respondents said in April that it’s a bad time to sell — virtually unchanged from 22% in January. (Those saying it’s a bad time to buy rose from 70% to 76%.)
Folks are settling down longer in general
Michael Neal, principal research associate for the Urban Institute’s Housing Finance Policy Center, believes that rate lock-in may be a factor in tying people to their homes, but adds that “we’re certainly running into this broader kind of shift in how long people stay in their homes that came out of the Great Recession.”
People move less than they used to, and the trend began before the housing bust. According to the U.S. Census Bureau, 9.4% of U.S. households moved in 2018-2019. Thirty years earlier, 17.2% of households moved. The “geographic mobility rate” has been trending downward since the 1960s, complicating efforts to pinpoint the role of rising mortgage rates.
In addition, Neal points to swiftly rising house prices as another variable that may be discouraging homeowners from selling. The median home resale price in March was 15% higher than 12 months before, according to the National Association of Realtors. “Homeowners today are willing to sit on their equity,” Neal says. “I think that probably plays a bigger role” than mortgage rates.
So maybe the golden handcuffs work in pairs, like real handcuffs: one hand restrained by low mortgage rates, the other restricted by rapidly growing equity.