US Housing Market Hit by “Mortgage Lock-In Gap”

The US housing market is experiencing a “mortgage rate lock-in effect,” where homeowners are reluctant to sell due to high interest rates and soaring mortgage prices. This lock-in effect varies across states and is determined by the “lock-in gap,” which is the difference between current mortgage rates homeowners pay and the higher rates available for new mortgages. The average rate on existing mortgages is 4.1%, while new mortgages average 7.25%, creating a national lock-in gap of 3.15 percentage points. This gap leads to significant increases in monthly payments for new buyers, deterring many from moving.

Colorado has the most enormous lock-in gap at 3.45 percentage points, with existing mortgage rates at 3.8% compared to new rates at 7.25%. This means a typical monthly payment for a new mortgage in Colorado would be $1,020 more, a 49.1% increase. Other states with significant lock-in gaps include Utah, Iowa, and Minnesota. This disparity is causing financial strain and stagnation in the housing market as homeowners choose to stay put rather than face higher costs.

RE/MAX Reports Housing Inventory Increase

According to RE/MAX, housing inventory increased by 6.7% in June compared to May and 38.1% in June 2023. This rise resulted in a 2.1-month supply of inventory, up from last June’s 1.4 months. The report highlighted a 7.2% decline in June home sales from May and an 11.6% year-over-year decrease, showing buyers’ sensitivity to interest rates and the need for lower rates to boost market activity.

The median sales price in June was $431,000, a 1.4% increase from May and 4.6% higher than last June. Buyers continued to pay 100% of the list price for the third consecutive month. New listings were 8.3% higher than in June 2023, despite being down 5.2% from May. The average days on the market shortened by one day from May to 33 days but were two days longer than in June 2023.

Fannie Mae Readjusts Forecast: Two Rate Cuts in 2024?

Fannie Mae’s Economic and Strategic Research Group has revised its forecast, now predicting two rate cuts by the Federal Reserve in 2024, one in September and another in December. This adjustment comes after two months of lower-than-expected inflation data from the Consumer Price Index, suggesting that the Federal Reserve will ease monetary policy to support economic conditions. Initially, only one rate cut was expected in December, but the favorable inflation reports have led to a more optimistic outlook.

In the housing market, Fannie Mae noted stronger-than-expected home price growth in the second quarter, although it anticipates moderation soon. Buyer demand remains constrained by unaffordability, while supply has been gradually increasing. The ESR Group has lowered its 2024 new home sales forecast to 639,000 units, down from 667,000, due to increased supply, particularly in large Sun Belt cities. Conversely, it has slightly raised its existing home sales forecast to 4.17 million units for 2024, up from 4.15 million, citing inventory growth and a modest decline in mortgage rates.