From July 2020 until November 2021, average mortgage rates for 30-year fixed-rate loans were consistently around or below 3%, according to Freddie Mac. Many who bought homes or refinanced mortgages during that time now find themselves effectively locked in by those low rates.
On the day this was written, that same average rate was 6.18%. Who wants to move when doing so means doubling their mortgage rate?
This week, the Harvard Joint Center for Housing Studies published results from a study examining the relationship between these locked-in buyers and broader home prices. And things didn't work out as many experts expected.
Economists Predicted the Worst for Housing Markets
Back in November 2022, Business Insider ran an alarming article under the headline, "Buckle in for a brutal free-fall in home prices and US housing is in a massive bubble, experts say."
The article quoted a tweet from Mark Zandi, chief economist at Moody's Analytics. "Assuming rates remain near their current 6.5% and the economy skirts recession, then national house prices will fall almost 10% peak-to-trough," Zandi wrote. "Most of those declines will happen sooner rather than later. And house prices will fall 20% if there is a typical recession."
It's unfair to single out Zandi, though. Business Insider quoted similar forecasts from six other economists and housing experts. If there was a consensus at the time, it was that higher mortgage rates would lead to rapidly falling home prices.
They weren't entirely wrong. But by the third quarter of 2023, they'd fallen by less than 2%: from $442,600 to $435,400, according to the Federal Reserve Bank of St. Louis.
True, home prices have continued to fall since then, but by Feb. 20, 2026, the median price was $405,300, a 7% drop over the more than three years since the article was published. That's hardly the "free-fall" experts predicted.
So, what put the brake on falling prices?
Locked-In Homeowners Slowed Falling Prices
Justin Katz and Robert Minton, who teamed up for the Harvard study, suggest, "Rising rates reduce the supply of existing homes due to mortgage 'rate lock,' where owners with low-interest, fixed-rate mortgages have a financial incentive to keep their homes and their valuable low rates, rather than selling," they wrote. "The result, Federal Reserve Chair Jerome Powell argued in 2023, is the 'supply of existing homes is really tight [and] keeping prices up.'"
Katz and Minton remind us that such a scenario wasn't obvious before it arose. "By reducing the number of home sellers, it also reduces the number of buyers because there are fewer current owners shopping for new homes. If potential sellers would have bought another home in the same housing market, then supply and demand fall equally, and prices remain unchanged."
The Harvard study found that locked-in homeowners may have boosted home prices in some markets, and slowed falls in others, although only in places where supply is constrained. Rate lock explains 40% of the gap between the predicted decrease in prices and the observed price growth between 2021 and 2023, Katz and Minton conclude.
What's Next for Interest Rates and Real Estate?
At the time this was written, the conflict in Iran had reversed an encouraging slide in mortgage rates, which had just dropped to their lowest level in more than three years, dipping a little below 6%.
That was great. But it was unlikely to persuade locked-in homeowners with rates below 3% to move.
For example, a homeowner with a $300,000 30-year mortgage at 3% would be paying $1,265 per month toward principal and interest. Moving and taking on another $300,000 loan at 6% would cause their monthly P&I payment to jump to $1,799. That's an increase of $534, or 42%, in additional interest costs.
Similarly, many prospective first-time homebuyers who made their plans when rates were around 3% may struggle to get their heads around the elevated homeownership costs presented by 6% rates, sky-high homeowners insurance costs, and increased property taxes.
Politicians have promised to drive mortgage rates down to ultra-low levels again, and have pressed the Federal Reserve (which has only limited influence over those rates) to help them achieve that goal. But, so far, they have been met with strictly limited success.
New Construction Isn't Keeping Up With Demand
As we have repeatedly suggested, the only way to make housing more affordable is to meet demand by building more new homes. But, unfortunately, that's not happening.
"The U.S. housing supply gap widened to 4.03 million units as new construction faltered last year, fueling a vicious cycle of displacement that has essentially erased an entire generation from the market," reported Realtor.com earlier this week.
"Nearly 2 million young would-be buyers found themselves trapped in a state of suspended adulthood, reflecting affordability headwinds and other structural hurdles, according to the latest supply gap report," the article continued.
