This housing economist expects the lock-in effect to ease up in 2024

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The housing market's lock-in effect refers to a phenomenon where some homeowners, faced with rising mortgage rates, choose to stay in their current homes rather than selling and taking on a higher monthly payment. This has slowed inventory turnover and reduced resale transactions over the past 18 months.

Look no further than November 2023, which saw 316,990 new listings on Realtor.com. That’s down -16.0% from November 2021, when there were 377,450 new listings.

Heading into 2024, many real estate agents hope that the lock-in effect might start to ease up. The thinking is that if mortgage rates can drift toward 6.00%, some would-be move-up sellers might decide to take the plunge.

These optimistic agents point to the fact that new listings in November 2023 were actually +5.4% above November 2022 levels (300,614). Suggesting, in their view, that new listings may have bottomed and it’s up from here.

Click here to view an interactive version of the chart below

To find out if the so-called “lock-in effect” might actually ease up in 2024, ResiClub reached out to Odeta Kushi, deputy chief economist at First American Financial Corporation, a Fortune 500 company (No. 481) that provides title insurance and settlement services.

Below is ResiClub’s Q&A with housing economist Kushi.

Q: Over the past two months, the average 30-year fixed mortgage rate has fallen from October's high of 8.03% to 6.66% as of Thursday. In your view, what does it mean for the U.S. housing market?

Lower rates have a dual impact on the housing market – alleviating the rate lock-in effect for potential sellers and improving affordability, all else held equal, for potential buyers. If mortgage rates continue to fall gradually, the housing market may improve in 2024.

Q: As mortgage rates started to spike in 2022, the number of new listings entering the market sharply declined. Some analysts refer to it as a lock-in effect: Homeowners who would typically sell their homes and purchase something new are opting to stay put instead of dealing with a higher mortgage rate and increased monthly payments. Is the peak "lock-in effect" now behind us? Do you anticipate a soon-to-come recovery in new listings?

A lack of supply will continue to limit housing market potential, as approximately 90% of homeowners with a mortgage have an interest rate at or below 6%. If rates remain above 6% in 2024, as consensus forecasts predict, there is limited incentive for homeowners to sell if it will cost them more each month to borrow the same amount of money. However, recent declines in the average 30-year fixed mortgage rate, combined with indications from the Federal Reserve that the monetary tightening cycle has peaked and that rate cuts are possible next year, means that the housing market is poised to strengthen in 2024. A significant rebound is unlikely, but modest improvement in the number of new listings and the pace of home sales are expected.

Q: The U.S. housing market will soon transition from the seasonally softer window into the seasonally stronger spring window. What's your early read for spring 2024?

Cautiously optimistic. Barring any unforeseen events, mortgage rates should gradually decline in 2024, which should bring some buyers and sellers off the sidelines. As of 2022, over half of millennial households were homeowners, which still leaves many more millennials who may want to become homeowners. In the short term, reduced affordability and limited inventory may lead them to delay, but not forgo their transition into homeownership. This millennial ‘shadow demand’ will continue to trickle into the housing market in 2024, as millennials motivated by life changes, such as moving for a job or growing families, purchase homes.

Q: When taking into account mortgage rates, house prices, and income levels, housing affordability over the past year has reached levels not seen since the 1980s. Heading forward, what's the most likely pathway to improved housing affordability?

The most likely pathway is through a combination of lower mortgage rates, positive household income growth, and moderating house price growth.

Mortgage rates: The ongoing deceleration in inflation, coupled with the Federal Reserve’s indication of cuts in the federal funds target rate next year, suggests an environment supportive of slow and steady mortgage rate declines.

House prices: The housing market will likely continue to suffer from an imbalance between housing supply and demand, which will keep upward pressure on prices. House price growth is likely to remain positive, but at a more moderate pace in 2024.

Household income: The labor market faces a persistent labor shortage, putting upward pressure on wages, and therefore household income, but that shortage has narrowed from the peak of 2022, and will likely continue to narrow in 2024, which means the pace of wage growth will likely slow, but remain positive.

Q: When it comes to housing economics, what’s not getting talked about enough?

Long-run demographic trends.

Today, millennials, the largest generation to date, are continuing to age into their 30s. The population of 30-to-39-year-olds will continue increasing through at least 2030, which means the demographics for homebuying will remain favorable in the coming years. And just as younger generations have been transitioning into homeownership later and later compared with their predecessors, today’s seniors have been living longer and increasingly aging in place, which increases housing demand relative to previous generations. However, this transition, much like millennials’ transition into homeownership, is delayed, but not forgone. The number of people 80 years of age or older is expected to more than double between 2022 and 2040, increasing from 13 million to 28 million. As the baby boomer generation ages into their 80s, starting slowly in the late 2020s and picking up speed in the 2030s, they will likely begin downsizing and selling their homes, putting more housing supply on the market. Over the next decade, as baby boomers age out of homeownership, the housing shortage may narrow and eventually disappear.