Have you recently considered selling your existing home and purchasing a new one? If so, you might already be familiar with what the industry calls the lock-in effect or the mortgage lock-in gap.

If you aren’t familiar with these real estate buzzwords, read on as we explain what they are, how they affect you, how Texas compares with the rest of the country and other states, and how purchasing a new-build home can help unlock the lock-in effect.

The Mortgage Rate Lock-in Effect

Here’s a short explanation of the lock-in effect. Homeowners who want to sell their current home and purchase another may have a historically low mortgage of 3%, 4%, or 5%. Today’s mortgage market is hovering in the 7% range, requiring a higher payment. The difference between the two rates is the “lock-in gap.”

Because of the higher costs, homeowners often choose to stay in their current home with its lower interest rate and payments, even if it is inadequate for their current needs. If they purchased a new home – even a smaller home – their costs would sharply increase. The inability to move for financial reasons renders the housing market frozen.

Impact on the Real Estate markets

The lock-in effect has a depressive impact on the real estate market, causing a frozen housing market. First-time homebuyers who would usually trade up from a starter home stay put. Homeowners who want to move to a larger home often find the supply limited and prices high. In short, a housing market freeze makes it even more difficult for those looking for a home to find one.

The lock-in gap has recently eased with interest rates and home prices coming down. Some experts believe this could be the beginning of a trend, but time will tell.

Homebuyer Mobility

The consequences of the lock-in effect for buyers impact every part of family life. An expanding family can’t move to a home with more space. Someone who wants to pursue better job opportunities in another location can’t afford the higher mortgage and has to stay put. Empty nesters who prefer a smaller home find they would pay more for a smaller footprint than they are for their larger home. Those who want to move closer to family must wait until mortgage rates come back down and the market loosens up.

There are cases where people have to move, such as when the only job option is in a different city or after a divorce. In these extreme cases, people move, even though they may sacrifice their lifestyle due to higher housing costs.

As time passes, it becomes harder and harder for people to postpone moving, and some experts believe these necessary moves are beginning to ease the lock-in gap.

Understanding Mortgage Rate Gaps

The mortgage rate gap is the difference between currently available mortgage rates and the average mortgage rate held by homeowners. The current lock-in gap for the United States, the difference between average existing mortgage rates of 4.1% and the new mortgage rate of 7.25%, is 3.15%. However, lock-in gaps can vary significantly by state.

Colorado has one of the highest lock-in gaps in the nation. The combination of lower average existing mortgage rates of 3.8% and higher new mortgage rate averages of 7.25% makes their gap 3.45%. For a $454,000 mortgage, a homebuyer in Colorado would pay $1,020 per month more.

Texas has one of the country’s lowest lock-in gaps. Existing average mortgage rates are 4.3%, and new mortgage rates are around 6.85%, for a gap of 2.55%. For a $336,000 mortgage, the difference in the old and new mortgage rates would mean an increase of only $340 per month.

Note these numbers are accurate as of December 2024 and are subject to change with time.

Is the Lock-in Effect Fading?

Some experts believe that the lock-in effect is beginning to wane. They theorize that people can only hold off so long, and then they have to move for a new job, the declining health of a family member, or maybe a new set of twins. Certain life circumstances can force a move, no matter the financial consequences.

Soften the Lock-in Effect with a New Build

Even though buyers can’t match an existing 3% mortgage rate today, they might be more likely to move up, downsize, or relocate if they buy their next home in a new home community. Why? Because home builders offer incentives that aren’t available when purchasing an existing home.

Reasons Home Builders Offer Incentives

Home builders often find it advantageous for business to offer incentives to home buyers. Their circumstances can significantly benefit you because of reduced costs to purchase a new-build home.

Free up capital – Home builders have to be able to move on to the next project, so they might offer an incentive to sell existing inventory.
Reduce carrying costs – Carrying costs are the expenses the builder must pay to hold property – property taxes, mortgage costs, insurance, utilities, and maintenance are a few.
Maintain cash flow – Like everyone else, a builder needs to keep enough cash to cover operating costs and invest in new projects.
Overall economic conditions – High interest rates or an economic downturn might stimulate builder incentives.
Generate interest and urgency – If sales are sluggish or the builder needs cash for another project, incentives are a good way to increase sales.

Commonly Offered Builder Incentives

Here are some popular incentives offered by builders in planned communities:

Price reductions on move-in ready homes – When a home is already built, the builder pays carrying costs monthly. If you purchase it, the builder frees up operating expenses and capital. Builders with completed homes in inventory at new home communities may be motivated to offer attractive incentives.
Cash towards closing costs – In this case, the builder assumes a portion of the closing costs, reducing the amount you, as the buyer, need to pay.
Rate buydowns – With a rate buydown, the builder offers discount points at closing, reducing the interest rate for the entire loan term, or a specific period.
Free upgrades and extra features – A builder may offer luxury appointments, appliance upgrades, or other perks to sweeten your new home deal.

Explore your options for buying a home in Texas at a Hillwood Community

Take advantage of the low lock-in Gap in Texas and explore moving to Hillwood Communities. Move-in ready homes are available, and many builders are offering incentives. Hillwood has many active communities throughout Texas in DFW, greater Houston, and just outside Austin. These master-planned communities feature new home designs and resort-style amenities that foster well-being and bring people together. Choose a lot you love for your new home in a community you’ll love coming home to.

Hillwood is also designing future communities for Texans. If you’ve felt stuck in the housing market freeze, thaw it out with Hillwood Communities in a home that will allow you to live your very best life. Moving to a beautiful new home is possible. Reach out to us to explore our existing and future planned communities.

The housing market is currently experiencing a phenomenon known as the lock-in effect – a wide-sweeping groundswell of homeowners holding onto their low mortgage rates, many sitting around 3%, making it difficult for them (and others shopping for pre-owned homes) to move homes when they want to or need to. The rise in mortgage rates since 2022 was the catalyst for this issue, leading to significant changes in the real estate market and beyond. This article explores the lock-in effect’s impact on both existing and new construction homes, providing insights for potential buyers and homeowners alike.

Understanding the Lock-in Effect

The lock-in effect occurs when homeowners with low mortgage rates are reluctant to sell their homes, as leaving would force them into taking out a new mortgage at the higher prevailing rate. This effect is rooted in the psychological comfort of those who have secured a low rate, and find themselves sitting on a mortgage around 3% – which is significantly lower than the current market rates. Homeowners feel “locked in” to their current mortgages, leading to reduced mobility in the housing market. This has created a complex dynamic in the real estate landscape, influencing both buyers and sellers alike.

Lock-In Effect’s Impact on the Real Estate Market

The lock-in effect has had profound implications for the real estate market, affecting both existing homes and new construction, but a litany of other factors continue to inform the market.

COVID-19, the Real Estate Market, & Rising Interest Rates

The COVID-19 pandemic caused a surge in demand for homes as people sought more space for remote work and lifestyle changes. Low interest rates, which made mortgages more affordable, created an extreme sellers’ market. Prices skyrocketed and homes were selling sight unseen for more than their list prices.

COVID also caused a dramatic employment shift, with low unemployment rates causing a tight labor market. This, coupled with supply chain issues and other factors caused prices to rise, fueling inflation fears. In 2022, to dampen inflation, the Federal Reserve raised the federal funds rate, which caused mortgage rates to rise, a stark contrast to the historically low rates seen during the years from 2010-2021. Inflation fears continued and the Fed kept raising the federal funds rate, which caused mortgage rates to continue to rise.

As mortgage rates rose, the financial landscape for potential homebuyers continued to change as well. Those who had locked in low rates during the earlier period found themselves in an advantageous position, creating the lock-in effect. And the continued rise in rates has not only influenced individual decisions but also reshaped market dynamics, inventory, pricing, and overall market activity. Homeowners who secured low mortgage rates during the pandemic (and before) became less inclined to move. This created a tight housing market with limited inventory.

Existing Homes: Lock-In Effect Creates Inventory Shortages

When interest rates were at historic lows, home inventories were also low because demand exceeded supply. The shortage of inventory created a highly competitive market, where home prices rose across the board. Some buyers faced bidding wars and had to act quickly to secure a home. This competitive environment was particularly challenging for first-time buyers, who struggled to compete with more experienced or financially robust competitors.

As interest rates have climbed, demand for new homes has cooled and prices have stabilized as many buyers stay on the sidelines waiting for rates to go down. Inventories are still relatively low, due to the lock-in effect, which keeps growing families in entry-level homes, prevents empty nesters from downsizing, and keeps retirees from moving closer to their grandchildren.

Those giving up their 3% mortgage are largely doing so because of circumstances they can‘t control: job relocation, divorce, or similar situations. But overall, this lack of mobility can have far-reaching consequences, affecting not just individual families but also the broader economic landscape. For instance, it can limit opportunities for career advancement if individuals are unable to relocate for better job prospects. Additionally, it can shape community demographics and the availability of housing in specific regions.

New Construction Homes Inventory & Pricing

The lock-in effect has less of an impact on new construction homes. The construction of new homes helps to mitigate some of the supply constraints seen in the existing home market, providing a vital outlet for demand.

While inflation affects builders, their pricing strategies offer some flexibility, making new construction homes an attractive option for buyers even when rates are high.

Builders at planned communities offer both home sites and quick move-in homes, providing more options for buyers. These builders have made a considerable investment so they need to keep their inventory moving. This gives them an incentive to extend special offers to buyers such as free home upgrades. Builders with in-house mortgage departments can even offer rate buydowns or cash towards closing costs.

New construction homes present a significant opportunity to avoid the problems created in the pre-owned home market by the lock-in effect. Plus, these homes are brand new and built with the latest technologies and energy efficient materials. What’s more, when new construction homes are located in planned communities, like the ones developed by Hillwood Communities, buyers enjoy a whole host of desirable amenities, enhancing the overall lifestyle for residents.

The Lock-In Effect and Our Outlook for the Future

As of August 2024, rates for 15- and 30-year fixed rate mortgages have hit 12-month lows and indicators suggest they may decrease further in 2024 or 2025. A significant drop in rates could prompt many buyers to re-enter the market, potentially leading to another seller’s market with high competition. Given this possibility, it may be both strategic and wise to buy a home now and refinance later when further rate decreases make that a smart move.

In new home communities, competition for lots and floor plans is expected to increase, so purchasing sooner could secure better options and prices. The anticipation of lower rates creates a unique window of opportunity for prospective buyers, allowing them to navigate the current market with an eye towards future financial benefits.

Embracing Opportunities in New Construction

The lock-in effect is reshaping the housing market, particularly for existing homes. However, new construction homes offer a viable alternative with diverse benefits. Hillwood Communities’ award-winning lifestyle communities provide unique advantages, including modern amenities, move-in ready homes, and premier builders. For those looking to buy, now is an opportune time to explore new construction options and secure a home in a desirable, new home Texas community in Manvel.

Contact Hillwood Communities today to learn more about our new home offerings and find your perfect home in one of our lifestyle communities!