Lock-in effect

By : J. David Chapman/January 9, 2025

We continue to look back on 2024 and ahead to 2025. A noteworthy trend throughout 2024 was the “lock-in effect.” Locked-in homeowners are those with ultra-low mortgage rates from previous refinancing waves who opt to stay put rather than sell and assume a higher mortgage interest rate. This behavior intensifies the inventory shortage by further limiting the supply of homes on the market.

We are expecting the lock-in effect to loosen its grip in 2025. As 2024 progressed, we started to see signs of change. More sellers began listing their homes, driven by life events or the need to tap into accumulated equity—a source of wealth that is especially pronounced among Baby Boomers. The increased sale of second homes and short-term rentals, along with a slight increase in new construction, also offers a glimmer of hope for a better-balanced market in 2025, potentially helping to address the affordability dilemma in the U.S.

The last few years have produced a conundrum that I have not seen in my 30 years of real estate. Sellers with equity and a desire to move couldn’t afford to do so because rates had doubled since they purchased their house. While buyers have always come into the market when rates go down, we also have a backlog of pent-up sellers that will come into the market slowly at first, then all of a sudden. Many reports show that 5% interest rates seem to be the tipping point to bring those sellers and houses to the market. But every rate decrease below 6% will see more and more sellers come into the market, along with buyers. My intuition is telling me that there will be a pretty hot real estate market as these two factors come together.

As we move into 2025, the real estate landscape will undoubtedly continue to evolve. 2024 produced another historically low transaction count, driven by elevated mortgage rates, rising home prices, and an overall low supply. Economic and political uncertainty further compounded these challenges. The interplay between mortgage rates, buyer demand, and seller readiness will shape the dynamics of the housing market. While the lock-in effect has created significant obstacles, the potential loosening of this effect offers a glimmer of hope. With increased home listings, new construction, and shifting economic conditions, 2025 could usher in a more balanced and affordable housing market.

J. David Chapman, Ph. D.. is professor of finance & real estate at the University of Central Oklahoma (jchapman7@uco.edu).