You Might Be Eager to Buy a House, but Homeowners Are Holding Tight to Their Mortgages

Too many homeowners have cheap mortgages that are worth keeping, which is a problem for the housing market. 

Besides high mortgage rates and steep home prices, the lack of existing homes for sale is keeping new buyers on standby. In a recent CNET Money survey, 13% of US adults said having access to more inventory would help them consider homebuying.

Limited housing supply is due in part to the "rate-lock effect." Homeowners who locked in historically low mortgage rates at the beginning of the pandemic cannot afford to increase (in some cases, double) the interest rate on their home loans, so they're staying put. 

Fewer sellers lead to scant options for buyers looking for homes on the market. "It is brutal, it's really, really tough," says Maja Sly, a broker with Keller Williams.

The recent interest rate cut from the Federal Reserve, which has already translated to lower mortgage rates, has some feeling hopeful that more homeowners will start packing up and moving, potentially opening up more inventory. 

Read more: Cheaper Mortgages Are Coming, but How Soon After Fed Rate Cut?

Limited housing inventory and high home prices

The rate-lock effect leads to a depressed housing supply in a couple of different ways. Some homeowners with low interest rates simply don't want to sell their homes, even if they can afford to buy a new one.

But more often than not, ongoing inflationary pressures and the high cost of living make it impossible for many homeowners to move, even if they want to, according to Sly. Those with a 2.5% interest rate, for example, would see their mortgage payment skyrocket if they were to buy a comparable home today, and not just because of today's rates. Home prices are also up by 47% since early 2020. 

"The price of homes and inflation have really outpaced income," Sly says. 

In the CNET Money survey, 45% of US adults said that home prices coming down would play a role in their decision to purchase a home. In other words, buyers are sensitive to high listing prices, and homes are not flying off the shelf, says Vickey Barron, a broker at Compass.

Moreover, prices are caught in the crosshairs of supply and demand: With lots of buyers and few available homes, prices are being driven up. Sly says many sellers feel they can jack up prices even if the home's quality doesn't warrant it. And sometimes they can get away with it, especially if people are moving from high-priced markets to cheaper cities, and don't mind paying up.

Another major problem for the housing market? Sellers are usually also buyers. So even when the rate-lock effect eases, sellers seeking out homes for sale could increase competition and drive prices higher. 

Of course, the other side of the housing inventory equation is brand-new residential construction. In the last year, newly built homes have become an increasingly popular option for buyers who can afford them. 

Read more: Mortgage Rates Aren't the Only Hurdle for Homebuyers. There Aren't Enough Houses

What will it take for homeowners to start selling? 

Although the Fed's 0.5% rate cut in September is good news, experts agree it's not enough to lift the housing market out of this gridlock.

"It's very positive, but it's not going to be a tsunami of [sellers] now," Barron says.

Fed Chair Jerome Powell acknowledged as much in his Sept. 18 remarks following the rate reduction. "As rates come down, people will start to move more, and that's probably beginning to happen already," he said. 

But he warned that a bigger problem is that the country is not building enough new homes to increase overall supply, which would also take pressure off home prices. "This is not something that the Fed can really fix," Powell said.

Sly said that mortgage rates will have to get back down into the 4% range for people to start selling and moving into new homes. Half of US adults in the CNET Money survey said a mortgage rate of 4% or below would allow them to realistically consider buying a home or refinancing. 

And a significant 29% of survey respondents said there is no mortgage rate that would allow them to realistically consider homebuying or refinancing. This underscores the challenges posed by low inventory, high home prices and inflation, regardless of interest rates.