US Mortgage Rates Near 6.7% Keep Homeowners Locked Into Cheap 3% Loans

• Nearly half of US mortgages carry interest rates below 4%.
• Existing-home sales remain well below pre-pandemic levels.
• High borrowing costs are keeping both homeowners and prospective buyers on the sidelines.

US homeowners are increasingly choosing to stay in their current properties as mortgage rates hover around 6.7%. The likelihood of Americans moving to a new home over the next year has dropped to a record-low 13.5%, according to data cited in Apollo’s latest US housing outlook. The situation is adding to the slowdown in the country’s housing market.

The main issue is the enormous difference between the mortgage rates many existing homeowners have and what new buyers face today. Around 50% of outstanding US mortgages have rates below 4%, while roughly two-thirds are below 5%. By comparison, a new 30-year home loan is currently priced at close to 6.7%.

For someone with a 3% mortgage, selling and purchasing another property could therefore mean replacing an exceptionally cheap loan with one that costs substantially more.

This situation is commonly described as the mortgage rate lock-in effect. Homeowners who might otherwise sell, upgrade, downsize or relocate have a financial incentive to remain where they are.

The impact on housing mobility has already been significant. Earlier research from Federal Reserve economists estimated that the mortgage lock-in effect accounted for 44% of the decline in mobility among mortgage borrowers between 2021 and 2022.

The result is a housing market with fewer homes changing hands, even when potential buyers and sellers may otherwise be interested in moving.

The slowdown is visible in sales figures. Existing-home sales were running at an annualized rate of approximately 4.06 million in July, around 1.2 million below the pre-pandemic average.

Buyer activity has also weakened. Redfin estimated that the number of active US homebuyers had fallen to about 967,000, a record low. Sellers now outnumber buyers by nearly 500,000, underscoring how limited housing-market activity has become.

With fewer buyers and homeowners reluctant to list their properties, the normal flow of housing inventory has been disrupted.

Mortgage rates may not fall quickly enough to encourage a major change in homeowner behaviour. Market expectations have also shifted around the Federal Reserve’s next moves, with prediction-market traders assigning roughly a 56% probability of a 25-basis-point rate increase at the September 16 meeting, compared with about 30% before Fed Chair Kevin Warsh’s Jackson Hole speech.

Higher interest rates can keep borrowing costs elevated and make refinancing or purchasing another home less attractive. That could prolong the incentive for homeowners with older, low-rate mortgages to stay put.

The housing slowdown is also affecting businesses that depend on people buying, selling and renovating homes. Home Depot is one example, as moving activity typically generates spending on flooring, paint, appliances and other home-improvement products.

The retailer has continued to deliver growth despite the difficult housing environment. Its second-quarter sales increased 5.7% to $47.9 billion, while adjusted earnings rose 5.1%.

However, customer traffic remains a concern. Transactions declined 1% during the quarter, while company management pointed to housing affordability as a factor limiting spending on larger, discretionary improvement projects.

Home Depot CFO Richard McPhail described the US housing market as unusually frozen, noting that housing turnover as a share of the overall housing stock has remained exceptionally low for around four years.

The company has seen some improvement in activity when mortgage rates temporarily decline. However, McPhail said there is currently no clear indication of a major turning point in the housing market.

For businesses dependent on homeowners moving or buying homes, a meaningful recovery could therefore depend heavily on borrowing costs becoming more affordable.

The bond market is another factor keeping mortgage rates elevated. The 10-year US Treasury yield, an important benchmark influencing mortgage rates, has climbed to its highest level since Donald Trump’s return to the White House.

As long-term Treasury yields remain elevated, mortgage rates may also struggle to decline substantially, even if the Federal Reserve changes its short-term interest-rate policy.

The US housing market’s recovery could remain gradual unless mortgage rates fall enough to narrow the gap between existing and new loans. Until then, homeowners with mortgages around 3% or 4% have a strong financial reason to remain in their current homes.

That creates a chain reaction: fewer homeowners sell, buyers have fewer homes to choose from, housing turnover remains weak and businesses that rely on home purchases and moves continue to wait for stronger activity. A sustained decline in mortgage rates could eventually unlock this supply, but for now, the US housing market remains largely frozen.