The "Golden Handcuffs" on Homeowners and its Effect on the Real Estate Market

New working paper from the FHFA shows the "lock in effect" of low rate, fixed mortgages

Over at Calculated Risk, Bill McBride has termed the current situation of many homeowners as being “locked in with golden handcuffs.” A very apt metaphor for those who took out mortgages between 2019 and mid-2021. As he puts it,

“And there are homeowners who want to sell for a number of reasons: upsizing (more babies), downsizing, moving for a new job, or moving to a nicer home or location (move-up buyers). It is some of the “want to sell” group that has been locked in with the golden handcuffs over the last couple of years, since it is financially difficult to move when your current mortgage rate is around 3%, and your new mortgage rate will be in the 6 1/2% to 7% range.”

He recently pointed to a working paper from the Federal Housing Finance Agency that attempts to quantify what those “golden handcuffs” are doing to the economy. This is the first time I’ve seen an attempt to measure the “lock in effect” on homeowners of having a fixed, low-interest mortgage in a higher interest rate environment.

“This paper finds that for every percentage point that market mortgage rates exceed the origination interest rate, the probability of sale is decreased by 18.1%. This mortgage rate lock-in led to a 57% reduction in home sales with fixed-rate mortgages in 2023Q4 and prevented 1.33 million sales between 2022Q2 and 2023Q4. The supply reduction increased home prices by 5.7%, outweighing the direct impact of elevated rates, which decreased prices by 3.3%. These findings underscore how mortgage rate lock-in restricts mobility, results in people not living in homes they would prefer, inflates prices, and worsens affordability.”

If you want to know why the real estate market has actually appreciated since rates more than doubled over the last few years, the line “prevented 1.33 million sales between 2022Q2 and 2023Q4” should explain that pretty thoroughly. Indeed, that’s why I had been predicting there would be no 2008-style housing crash.

Of course, it also means that a lot of homeowners are stuck where they’re at even though they would like to move/downsize/upsize, etc.

For those in such a situation, one possibility you should consider is renting out your current home and renting where you need to move too.

Other than that, it’s just about waiting for rates to come down. Given inflation has cooled, rates will probably ease by the end of the year. (Although long term, rates will probably be trending up to a permanently higher plateau.)

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