The consensus on the US mortgage lock-in effect treats it as a demand story: homeowners won’t move, sales have plunged, the market is stuck. What that framing underweights is the supply-side consequence, one that is now doing something the rate-hiking cycle was supposed to prevent.
The Lock-In Effect by the Numbers
The raw data, drawn from the Federal Housing Finance Agency, makes the stasis plain. Mortgages with rates below 3% edged down by just 10 basis points in Q2, to a share of 19.2% of all mortgages outstanding. The share of 3% to 3.99% mortgages fell by just 20 basis points in the same period, to 29.9%. Together, those two cohorts account for roughly half of every mortgage on the books in the United States. It took a full year to trim the sub-3% share by a single percentage point.
The reason for the paralysis is not complicated. As Wolf Richter reported for Wolf Street, from early 2020 through Q1 2022, the Federal Reserve purchased trillions of dollars of mortgage-backed securities and Treasury securities with newly created money, cutting its policy rates to near-zero and keeping them there. The result was mortgage rates at historic lows, home prices that exploded by about 50% in two years, and inflation that eventually exceeded 8%. Homeowners who locked in at 3% now face a market where the going rate is above 7%. The arithmetic of that trade-off explains everything.
The FHFA’s own analysis puts a figure on the gap. As of Q2 2024, the average outstanding mortgage carries a fixed rate that is 2.54 percentage points below the current market rate for a comparable loan. That is not a marginal incentive to stay put. It is a structural one, and it is not narrowing quickly enough to matter in the near term.
Meanwhile, the share of 6%-plus mortgages has risen to 22.5% of all mortgages outstanding, the highest since Q2 2015 and up from just 7.3% in Q2 2022. New originations are almost entirely in this bracket. The gap between what existing owners hold and what new buyers face is, in practical terms, the widest it has been in the modern FHFA data series.
The US Mortgage Lock-In Effect Is Pushing Prices Up, Not Down
Here is where the popular narrative runs into trouble. Higher rates were supposed to cool home prices. To a degree, they have: the Consumer Financial Protection Bureau notes that mortgage rates rose more than five percentage points from their January 2021 bottom of 2.65%, peaking at 7.79% in October 2023. The direct effect of that move, all else equal, would be downward pressure on prices.
But all else is not equal, because the lock-in effect has simultaneously crushed supply. According to the FHFA, the lock-in effect is estimated to have prevented 1.72 million home sales between Q2 2022 and Q2 2024. That is not a rounding error. Sales of existing homes have fallen by about 25% from pre-pandemic levels and have stayed there for four years, consistent with that estimate.
The supply restriction has its own price effect, and it runs in the opposite direction from rates. The FHFA estimates that the lock-in-driven supply squeeze has increased home prices by an estimated 7.0%, more than offsetting the direct rate effect, which decreased prices by an estimated 5.6%. The net result is that prices are higher than they would be in a normally functioning market, despite the most aggressive rate-hiking cycle in a generation. The consensus may be overweighting the rate effect and underweighting the supply effect that is working against it.
The 4.0% to 4.99% cohort is also worth watching. Its share has edged down to 16.5%, the lowest in FHFA data going back to 2013, and down from a peak of 40% in 2019. Those mortgages remain attractive relative to today’s rates, so their holders are not moving either. Life events, as the Wolf Street analysis acknowledges, will gradually force some sales: job relocations, deaths, divorces, growing families. But the pace at which those events drain the locked-in cohorts is, at present, barely perceptible in the data.
The US mortgage lock-in effect, in short, is not merely a freeze on transaction volumes. It is actively counteracting the price-correction that higher rates were meant to deliver. The FHFA’s own numbers put a 7.0% price premium on that dynamic. That is the figure the demand-side framing of this story tends to leave out.
