From the Philly Inquirer:
Why? the supply of homes, as measured by homes for sale, is way down. It looks like we will end 2023 with inventory shrinking between 10% and 15% over the year.
And that raises the question, why are people not putting their homes on the market when prices have risen so much over the past few years? It’s largely due to the surge in prices and mortgage rates, but not for the normal reasons.
Over the past 10 years, home prices have basically doubled. During that time, interest rates were at historic lows. If you bought a home or refinanced, your mortgage was likely 4.5% or less. Unfortunately, those low-rate mortgages have created a major quandary for homeowners.
If the homeowners sell their house, they can realize the price gains and put the funds toward a new home. But then they have to give up their low mortgage rate and take out a new loan at a significantly higher rate. Going from a 4% mortgage to an 8% one, for a different home whose price has also doubled, creates more financial strain than many people would likely want.
The unwillingness to trade in a low-rate mortgage for a high-rate one, a threat that economists warned about years ago, has been nicknamed the “lock-in effect.” Goldman-Sachs estimated that “nearly all mortgage borrowers have interest rates below current market rates, and that almost 90% have rates more than 2pp below and over 60% have rates more than 4pp below.”
In other words, if you own a home and are thinking of selling and moving to another house, you are almost certainly facing mortgage rates a lot higher than you currently have. That is making most homeowners think twice about entering the market. The soaring mortgage rates have created a financial barrier to selling and moving. Think of it as “Golden Handcuffs.”