Key Points:

• The rate lock-in effect peaked in Q4 2023 with a 3.2 percentage point difference between the average prevailing mortgage rate and the average outstanding mortgage rate.
  
  
• Due to lower mortgage rates and steadily increasing share of people buying homes at higher rates, the rate lock-in effect has loosened, prompting higher for-sale inventory and more sales activity.
  
  
• In the second quarter of 2022, nearly 93 percent of mortgaged homes had a rate below 6 percent. According to fourth quarter 2024 NMDB data, that share is down to 82 percent.

Existing-home sales increased in February, and our latest Existing-Home Sales Outlook Report projects we’ll see another increase in March, surpassing last year's figures. The modest positive momentum suggests that the housing market is entering the spring buying season in a stronger position compared to a year ago, although it remains significantly below pre-pandemic levels. Several factors are helping today's housing market, including the loosening of one of the primary forces that has held back the market since 2022.

“The rate lock-in effect has loosened enough for some potential sellers to list their homes for sale, contributing to higher for-sale inventory and more sales activity.”

The Housing Handcuffs Have Loosened

In the housing market, the seller and the buyer are often the same – the existing homeowner. To buy a home, you typically need to sell the home you already own. Most current existing homeowners either purchased their homes during the ultra-low mortgage rate years of 2020 through early 2022 or refinanced into historically low mortgage rates during those years. When mortgage rates doubled in less than a year, these homeowners found themselves ‘rate-locked’ into their homes. Why would anyone sell their home and take on a new, higher-rate mortgage when it would cost more each month to borrow the same amount? Historically, existing-home sales have constituted nearly 90 percent of all home sales and inventory. When so many existing homeowners choose not to sell, the housing market chokes. 

One way to measure the rate lock-in effect is by taking the difference between the average prevailing mortgage rate in any given quarter (the mortgage rate for home buyers) and the average mortgage rate on outstanding mortgages (existing owners). By this measure, the rate lock-in effect peaked in the fourth quarter of 2023, when the average prevailing mortgage rate was 7.3 percent, while the average mortgage rate on outstanding debt was 4.1 percent – a difference of 3.2 percentage points. This means that, on average, someone with a 4 percent mortgage rate would be selling their home to purchase another one at 7.3 percent. Given that the monthly principal and interest on the median-priced existing home of $398,400 is nearly $2,200 at a 7.3 percent mortgage rate, and just $1,500 at a 4.1 percent mortgage rate, many potential sellers were housing-handcuffed.

The good news is that due to a combination of lower mortgage rates and a steadily increasing share of people buying homes at higher mortgage rates, the rate lock-in effect has loosened. In the second quarter of 2022, nearly 93 percent of mortgaged homes had a rate below 6 percent. According to fourth quarter 2024 NMDB data, that share is down to 82 percent. In the fourth quarter of 2024, the average interest rate on outstanding mortgages was 4.3 percent, while the average prevailing mortgage rate was 6.6 percent – a difference of 2.3 percentage points. In monthly payment terms, that’s a payment of approximately $1,600 at the 4.3 percent rate, versus a $2,000 payment at the 6.6 percent rate. The rate lock-in effect will continue to choke housing market potential, but it has loosened enough for some potential sellers to list their homes for sale and contribute to higher for-sale inventory and more sales activity. 

Unlocking Market Potential

While the loosening of the rate lock-in effect has prompted some potential sellers to jump into the market, there are other factors at play. The decision to buy and sell is more than just a financial calculation. Lifestyle reasons, such as the five D’s – diplomas, diapers, divorce, downsizing and death – can trigger existing homeowners to sell, even if it means losing their low mortgage rate. Additionally, existing homeowners are sitting on significant equity cushions, which allow them to partially offset higher mortgage rates with larger down payments. However, the housing market will continue to be held back by affordability constraints and economic uncertainty. Nevertheless, while not the only factor affecting market potential, the housing handcuffs have loosened for now. Welcome news for a housing market that has struggled to gain momentum in recent years.

March 2025  Existing-Home Sales Outlook Highlights

For the month of March, First American updated its Existing-Home Sales Outlook Report to show that:

• Existing-home sales for March are expected to increase 0.3 percent from February’s pace of sales, and increase 3.7 percent compared with the pace of sales a year ago.
  
  
• The largest contributors to the projected monthly increase in existing-home sales are positive economic growth (+0.3 percentage points), increased house-buying power (+0.2 percent), and higher household formation (+0.05 percentage points).

Methodology

Our Existing-Home Sales Outlook Report ‘nowcasts’ existing-home sales, which include single-family homes, townhomes, condominiums, and co-ops on a seasonally adjusted annualized rate based on the historical relationship between existing-home sales, U.S. demographic trends, house-buying power, and the prevailing financial and economic conditions, as well as momentum, a weight assigned to past values. Please note that the Existing-Home Sales Outlook Report is based on assumptions about demographic, economic and financial conditions. Actual values may differ from those projected. Recent existing-home sales estimates are subject to revision to reflect the most up-to-date information available on the economy, housing market and financial conditions.