How far do mortgage rates have to fall to break the ‘lock-in effect’?

(NEXSTAR) – Most Americans lucky enough to buy a home before mortgage rates skyrocketed in the spring of 2022 are unlikely to want to move anytime soon, according to a new survey.

Bankrate asked Americans how low mortgage rates would have to be before they would consider selling their current home and breaking the mortgage lock-in effect by buying a new home with a new mortgage rate.

“The mortgage lock-in effect has frozen home sales for the past several years,” said Bankrate analyst Jeff Ostrowski. “Unfortunately, these results do not bode well for a thawing market. Many homeowners do not want to sell at all, and many potential buyers are waiting for mortgage rates to fall below 6%.”

Only two percent of all Americans said they would be able to buy a home this year with a mortgage rate above 6% (the 30-year fixed-rate mortgage rate was 6.77% on Wednesday).

Homeowners were more likely than non-homeowners to say they would need lower rates to buy, with 47 percent saying rates would need to drop below 5 percent. Thirty-eight percent of homeowners said there is no mortgage rate that would give them peace of mind about buying a new home this year.

The survey, conducted June 18-20, included 2,294 U.S. adults, 1,133 of whom were current homeowners, according to Bankrate’s methodology.

Locked in a starter home

A combination of high mortgage rates, low supply and rising house prices have made buying a larger home – or even buying a first home – unfeasible.

The findings also show that many Americans who already live in so-called starter homes are not likely to leave anytime soon, leaving them to live with the tight housing they once planned to sell as their families grow.

According to Freddie Mac, more than six out of 10 mortgages have interest rates below 4%, and that fixed-rate effect is exacerbating the housing supply crisis. Despite the reluctance to maintain favorable rates, Freddie Mac says life events will still force people into the market.

“Generation X is generally several years away from retirement and has already moved from their first home to accommodate their growing families; therefore, they are less likely to move from their current home,” according to researchers at Freddie Mac. “In contrast, millennials, particularly younger millennials, are more likely to change jobs and move to larger homes as families grow, making them more likely to move regardless of their current low rates.”

Are rates going down?

Homeowners and potential buyers who wait for rates to allow them to re-enter the housing market may not get the chance to get back into the housing market this year, experts say.

“Mortgage rate expectations continue to change,” Ostrowski said. “The U.S. economy is still going strong, and the Federal Reserve continues to delay its first rate cut. Add those things up, and the consensus is that mortgage rates will remain in the 6.5% to 7% range through the end of 2024.”

Redfin analysts agreed, predicting rates would steadily decline over the course of the year to around 6.6%