Morgan Stanley: Lock-in effect keeps stalling the rebound in existing home sales

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While housing affordability remains strained, especially compared to pre-pandemic levels, we’ve seen a notable improvement over the past year, with the average 30-year fixed mortgage rate dropping from around 8.0% to 6.5%.

However, this improvement in affordability hasn’t resulted in a meaningful increase in U.S. existing home sales. In fact, total existing home sales for 2024 could finish below 2023 levels (4.09 million), which were already well below pre-pandemic figures from 2018 (5.34 million) and 2019 (5.34 million)

"This quantum improvement in affordability [over the past year] has only happened a few times in the past four decades. In most other years, a rise in affordability at this scale would lead to healthy growth in home sales over the next year or two," wrote Jim Egan, Morgan Stanley’s head of housing market research, in a report last week.

Egan notes that over the past 40 years, when the affordability index improved at least 10% year-over-year—like we’ve seen over the past year—existing home sales rose on average by +16% year-over-year.

Instead of an existing home sales bounce, they were slightly down to flat this year, and Egan only expects a “modest” increase of +5% over the next 12 months.

The reason existing home sales are struggling to recover? Egan points to the lock-in effect.

“Locked-in borrowers will limit the market's expansion for now,” wrote Egan. “High mortgage rates have created a lock-in effect for homeowners who secured lower rates, especially during the pandemic. Despite the latest drop, the prevailing mortgage rate is 2.5 percentage points higher than that for most existing loans, meaning homeowners are reluctant to refinance or sell their homes if they don't have to. Indeed, more than 80% of borrowers' current mortgage rates are lower than the prevailing rates.”

For evidence that the existing home market is still constrained, just look at mortgage purchase applications.

Here’s the seasonally adjusted Mortgage Purchase Application Index reading for the second week of October, by year

October 2017 —> 242.9

October 2018 —> 228.4

October 2019 —> 241.7

October 2020 —> 304.6

October 2021 —> 266.2

October 2022 —> 161.8

October 2023 —> 129.8

October 2024 —> 138.4

Late this summer, refinancing started to gain a little momentum as the average 30-year fixed mortgage rate approached 6.0%. However, that momentum has waned in recent weeks as the average rate jumped back above 6.5%.

Here’s the seasonally adjusted Mortgage Refinance Index reading for the second week of October, by year:

October 2017 —> 1,399.6

October 2018 —> 919.6

October 2019 —> 2,076.9

October 2020 —> 3,620.5

October 2021 —> 2,807.9

October 2022 —> 386.1

October 2023 —> 347.6

October 2024 —> 734.6

On Friday, November 8th, in New York City, ResiClub will host ResiDay, bringing together the brightest minds in the housing market. This will be our first-ever one-day conference.

There will be hundreds of influential housing investors, developers, lenders, and brokers who are shaping the future of residential real estate, homebuilding, mortgage lending, and build-to-rent at ResiDay. Several prominent business and real estate journalists will also be there.

The ResiClub team will lead a day of insightful discussions on market trends and strategies impacting the future of the U.S. housing landscape. ​Expect top-tier speakers, ample networking opportunities, and hours of engaging discussions on the future of the U.S. housing market.

[ResiClub PRO members, our paid tier, can attend ResiDay for free]

Are you a real estate investor? Do you own rental property? 🏠

If so, you’re invited to participate in the Flock Homes-ResiClub Real Estate Investor Survey.

The survey results will be published later this month in ResiClub—and in other mainstream media publications.

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