The lock-in effect refers to the phenomenon where homeowners with existing mortgages at low interest rates are hesitant to sell their homes and buy new ones at a much higher mortgage rate.

A full breakdown of where today’s homeowners fall on the mortgage-rate spectrum:

Below 6%: 88.5% of mortgaged U.S. homeowners have a rate below 6%
Below 5%: 78.7% have a rate below 5%
Below 4%: 59.4% have a rate below 4%
Below 3%: 22.6% have a rate below 3%

*Where do you fall on the mortgage rate spectrum?*

And it makes sense. Many homeowners, myself included, were able to purchase homes, or refinance their current property, at unprecedented low mortgage rates during the pandemic. These homeowners then felt tied to their properties by “golden handcuffs”, as though they couldn't sell their homes and trade their rate for one 3 points higher.

It's estimated that we saw a staggering 1.3 million "lost" existing-home sales, between Q2 2022 and Q4 2023 because of this lock-in effect.

What will ease the lock-in effect going forward?

Life events: We REALTORS call it the 5 Ds. Diapers, diplomas, diamonds, divorce & death. These kinds of life events prompt homeowners to sell their current homes and move.
Falling mortgage rates: As mortgage rates decrease, improved affordability could entice more homeowners to sell and buy new homes. While homeowners might not trade in their 4.0% mortgage rate for a 7.0% rate, they might consider moving if it means taking on a 5.5% mortgage rate.

The good news is, that interest rates have dropped to their lowest level since August 2022, providing much-needed relief for buyers.

August’s interest rate was recorded at 6.1%, down from 6.6% in July.

As a real estate professional here in Central Florida, I personally have seen more and more clients starting to break free of the 3% interest rate golden handcuffs. Life circumstances seem to be outweighing the financial disincentives when considering a lifestyle move.

As rates continue to trend down, the lock-in phenomenon will continue to fade, providing more options to buyers and sellers alike.