New research from Zillow shows older homeowners and those in less expensive metros are the least likely to be discouraged from moving by today's higher mortgage rates – with boomer homeowners in Pittsburgh leading the way.
About 10.8 million current homeowners nationwide, or 13 percent, should be immune to the effects of high interest rates. Markets with more homeowners free from rate lock have seen more homes listed for sale, giving buyers more choices during a prolonged shortage of inventory.
Many homeowners have a mortgage rate below the prevailing rate or an income too low to comfortably afford a mortgage at today's higher rates and are therefore “rate locked” — financially incentivized to keep their current home and low rate.
However, census data shows that 10.8 million homeowners are both mortgage-free and make enough income to afford monthly payments on a typical home where they live, if they bought it today. These homeowners are likely to be older and live in more affordable markets. Nearly 38 percent of boomer homeowners in Pittsburgh are free from rate lock, making them the least locked-in of all generations of homeowners among the 50 largest U.S. metros, Zillow said.
“The so-called mortgage rate lock-in effect has seriously curtailed both home sales and inventory over the past two years. Homeowners are more free to sell in less expensive areas — bringing more resale inventory into the market and facilitating sales,” Orphe Divounguy, Zillow senior economist, said in a release. “Massive appreciation has left homeowners with record levels of equity, and many are financially able to move on, even given today's higher rates.”
Rate lock has shown signs of easing in recent months, but the flow of listings is still significantly below pre-pandemic rates, and total inventory is in an even bigger hole, down roughly 37 percent compared to 2019.
Mortgage rates’ drastic shift is behind many homeowners' reticence to list. Rates reached record lows in 2020 and 2021, doubled in 2022, hit 23-year highs in 2023, and have remained elevated ever since. New research from the Federal Housing Finance Agency shows that mortgage rate lock-in prevented roughly 1.33 million sales between the second quarter of 2022 and 2023 year-end.
Owners in more affordable markets face lower barriers to entry for their next home, generally have less mortgage debt, and can more easily move on — with or without taking on a new mortgage. The share of owners free of rate lock is highest in relatively affordable markets in the upper Midwest — Pittsburgh, Buffalo and Cleveland — the latter two of which are among Zillow’s hottest markets for 2024.
It's harder to give up a low rate and more expensive to move in the least affordable markets, so there tends to be fewer new listings of existing homes coming on the market in these areas. Zillow data showed a clear positive correlation between the share of homeowners without a mortgage and the change in new listings since early 2022, when rates rose. Metros with a higher share of locked-in homeowners saw larger decreases in new listings.
Baby boomers are least affected by rate lock, while millennials and Gen Zers are significantly more so. Older homeowners tend to have more equity built up in their home and boomers have the highest incomes, on average, among current generations. Higher wealth and higher incomes make a cash purchase or higher down payment for their next home (in their market) more doable, and mortgage payments less onerous. Nationwide, 17 percent of baby boomer homeowners are free from the effects of rate lock, compared with just 6 percent of millennial homeowners and 12 percent of Gen X homeowners.