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Back in the late 1970s, the term “golden handcuffs” was popularized to explain why ambitious professionals were choosing to stay at corporate titans, like General Electric and Procter & Gamble, rather than exploring other opportunities or starting their own businesses. The reason being that the generous compensation packages were simply too good to leave.

Today, that same concept can be applied to the U.S. housing market: Ultralow mortgage rates, which were available during the pandemic, now function as a type of golden handcuff. Many homeowners with these low rates are uninterested in moving. The reason is that if they were to sell their homes and buy something new, they would be exchanging their ultra-low 2% and 3% mortgage rates for something in the 7% to 9% range (with some back door exceptions). The potential payment shock is simply too steep for many would-be sellers/buyers to handle.

For instance, consider a borrower with a $500,000 mortgage at a 3% interest rate, resulting in a monthly principal and interest payment of $2,108 over a 30-year loan. However, at a 7.08% mortgage rate (Monday’s average rate), that same payment would skyrocket to $3,353 per month.

That math explains why, in November 2023, there were 16% fewer new listings on Realtor.com (316,990) as compared to November 2021 (377,450).

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While transactions are still occurring every single day in the U.S. housing market—housing never stops—existing home sales are presumably right now about as low as they can go.

Simply put, this so-called “lock-in” effect (i.e. the financial shock that occurs for homeowners when they consider giving up their current mortgage in exchange for one at today's rates) has drained what I call “churn” (i.e. people selling their home to buy something new) out of the market.

As a result, transaction volume in the resale/existing market is primarily made up of life events that force sellers' hands: death, divorce, job relocation.

“Rapidly deteriorating affordability in this cycle has already caused significant decreases in housing activity, specifically existing home sales, but has left national home prices more or less unscathed. As we have detailed in numerous research reports, the biggest reason is the lock-in effect. Homeowners have not experienced the decline in affordability . . . They have locked in low, fixed-rate mortgages for 30 years that have simply disincentivized them from listing their homes for sale,” wrote Morgan Stanley researchers in a recent report to investors.

Morgan Stanley added: ”In other words, homeowners represent 'strong hands' in this cycle.”


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