Low Mortgage Rates Could Slow Selling Activity

June 17, 2014

Mortgage rates were at all-time lows last year, and those home owners who were able to lock in low rates may be less willing to sell in the future. The phenomenon is being dubbed the “lockdown effect.”

Home owners who were able to snag mortgage rates at 3.5 percent to 4 percent may be hesitant to sell their homes in the coming years as mortgage rates inch up. Mortgage rates, which lately have averaged around 4.2 percent for a 30-year fixed-rate mortgage, are expected to reach 5 percent by next year.

Economists who spoke to the National Association of Real Estate Editors last week project that an increase in rates to 5 percent could lead to a 5 percent decline in existing home sales, and a rise to 6 percent would hamper sales by 15 percent.

“We’ve locked all of these people into these low rates, mostly in 30-year fixed mortgages,” says Mark Fleming, chief economist for CoreLogic. “There’s a huge disincentive … to sell at any point in the future. My expectation is that housing turnover rates will be down significantly in the future due to this rate lockout effect.”

For home owners who do eventually decide to move on, they may want to hold onto their current home and rent it out to keep their low interest rate, some economists say.

“We have more everyday folks becoming unplanned, accidental landlords in the future because they don’t want to give up their 3.5 percent rate,” says Lawrence Yun, chief economist for the National Association of REALTORS®.

Source: “The Downside of Low Interest Rates: Reluctant Home Sellers,” The Wall Street Journal (June 13, 2014)