Video Transcript
Dan at Homebuyer.com (00:00)
Welcome. Today we’re here with Jonah Coste and economist with the FHFA, the Federal Housing Finance Agency. Thank you so much for being here, Jonah.
Jonah Coste (00:07)
Thanks, great to have you here.
Dan at Homebuyer.com (00:09)
So your study with your team showed that the lock -in effect in mortgage rates is real. Your team put a number to it. First, tell us what the lock -in effect is and tell us what the study found.
Jonah Coste (00:22)
Yeah, so first off, let me say that the views I express here are my own, not those of the FHFA, or my co -authors, Ross Batzler, Will Dorner, and Mike Seiler. So in the US, virtually all active mortgages are fixed -rate mortgages. And when a borrower’s existing interest rate is below the rate that they could get on a new mortgage, they’re less likely to sell their home, because selling would mean giving up their below market rate. This is what we call the lock -in effect. And our study found that the…
This lock -in effect prevented 1 .33 million sales between 2022 quarter two and the end of 2023.
Dan at Homebuyer.com (00:57)
Is there specific mortgage rate at which the lock -in effect begins? Do rates have to be at, say, 3 % like they were, or does it work at other numbers too?
Jonah Coste (01:07)
Well, what we found is what matters is not the absolute level of your interest rate or market rates, but the difference between the two. For every percentage point that market rates exceed a borrower’s existing fixed rate, the borrower is 18 .1 % less likely to sell their.
Dan at Homebuyer.com (01:23)
That’s incredible. An interesting part of that study, as I saw, was that it actually works in reverse too, that when mortgage rates drop, homeowners become more likely to list their homes. Did I see that right in the data?
Jonah Coste (01:38)
Up to a certain point, yes. We find that you’re more likely to sell your home if you could get a new rate that’s say one point less than your current rate. But this effect levels off somewhere between one and two percent because at that point the benefits to refinancing exceed the fixed costs. So you can get the benefits of a lower rate without having to move.
Dan at Homebuyer.com (02:01)
So would you say that the lock -in effect reduces home inventory, we’ll say rising mortgage rates, it reduces home inventory because the lock -in effect. Does that do more than causing buyers to sit out on the sidelines? Because that’s another effect of rising rates is that home buyers may decide to sit out a little.
Jonah Coste (02:01)
Thank you.
Yeah.
Right, so rising mortgage rates decrease demand and also decrease supply due to this lock -in effect. So the net impact on prices could go either direction. And our theoretical model and our empirical results both indicate that the lock -in effect is stronger, meaning that the net impact has been to push prices up.
Dan at Homebuyer.com (02:40)
So as mortgage rates go up, home prices go up because of the lock -in effect. That’s in essence what we’re saying. So then will a drop in mortgage rates, so today mortgage rates are hovering in the 6 % to 7 % range, let’s say. Does a drop in mortgage rates just end this and cause home prices to drop?
Jonah Coste (02:46)
That’s what we’re finding, yes.
Well, it would take a very large drop in rates to end our current episode of lock -in. As of the fourth quarter of 2023, the average borrower had a fixed rate that was 3 .24 percentage points lower than what they could get on a new mortgage. That gives you a sense of how big of a drop we’d need to completely end our current episode of lock -in. However, the effect’s pretty linear, so a smaller rate decrease would help alleviate the effect.
Dan at Homebuyer.com (03:14)
Yes.
Is the effect of the lock -in effect the same for all home buyers? Specifically, how is it for first -time home buyers or other home buyers that may be in the lower two core tiles for their purchase price range?
Jonah Coste (03:45)
Yeah, so the biggest difference we find in terms of sensitivity to lock -in is that borrowers with lower value homes are less sensitive. Specifically, borrowers with homes valued under $300 ,000 are 13 % less likely to sell for every percentage point of lock -in compared to 18 .1 % for owners overall and 22 .6 % for homes valued over $600 ,000.
So you can view this positively as less affluent borrowers are less locked in. But it’s also negative. It indicates that less affluent borrowers are less able to strategically time their purchases, which could worsen inequality.
Dan at Homebuyer.com (04:26)
is there an easy data point or some sound bite or some quote that our audience can use to sound smart about the lock -in effect? Like what is one big tidbit that they could take out to share with the real estate agents, with their friends, with whomever? Something you find really interesting.
Jonah Coste (04:44)
Yeah, I would say that currently the average borrower is about three percentage points locked in, which decreases their likelihood of selling by over 50%. That’s the big takeaway, I think, from our paper. A secondary one is that higher interest rates can be inflationary due to, and home prices due to this lock -in effect.
Dan at Homebuyer.com (05:06)
That’s totally contrary to what my YouTube comments always say. So it’s great to hear from an economist who studies this full time. I appreciate that Jonah. Thank you so much for joining us. It’s great to have you here. A really, really interesting study. You and your team. Thank you.
Jonah Coste (05:21)
Yeah, again, thanks for having me.
Dan at Homebuyer.com (05:25)
Okay. Appreciate it. That was
