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MortgagePoint » Your Trusted Source for Mortgage Banking and Servicing News 46 December 2023 F E A T U R E H omeownership has long been associated with a sense of security and stability. While this is generally still true, homeowners are starting to feel "locked" into their homes due to the interplay of their low-rate mortgages, rising interest rates, rising home prices, and the lack of inventory. These factors are creating what is known as the real estate "lock-in effect," but it's not all negative. This effect also increases home equity which homeown- ers can access to renovate homes, save for retirement, and pay off debt. The Lock-In Effect Defined T he term "lock-in effect" refers to a situation in which someone feels trapped or constrained by their current choices or circumstances, making it difficult to make changes or switch to alternative options. In the case of homeownership, homeowners feel stuck in their existing properties due to unfavorable economic conditions. Today, the main driving forc- es behind this effect are the combination of homeowners with historically low-rate mortgages, the recent surge in interest rates, and the lack of available housing inventory to buy if they sell. The Impact of Interest Rates L ow-interest-rate mortgages have been a boon for homeowners, allowing them to secure favorable loan terms and lower monthly payments for over a decade. However, with a rapid increase in interest rates rise—as we have seen over the last year—a problem arises. Selling their home and trading in their histori- cally low mortgage rate pushes home- owners to stay put, even if their circum- stances or preferences have changed. In the past 20 months, the Fed has raised interest rates the quickest in history—11 times since March 2022. They paused rate hikes in June but increased them in July, going from 5%-5.25% to 5.25%-5.5%. Rates have remained steady—but still elevated—at the last two Federal Open Market Committee meet- ings as inflation cools. The next meeting is December 12-13, which will determine if the rates increase, decrease, or remain the same. Consequently, the number of avail- able homes for sale has plummeted. In October, home sale transactions were down 14.6% compared to a year ago, according to the National Association of Realtors. Low Housing Inventory: A Compounding Factor W hile interest rates are pivotal, they are not the only factor in the lock-in effect. The lack of inventory and scarcity of homes for sale has reached unprecedented levels. Various reasons contribute to this shortage, including demographic shifts, construction labor shortages, and the lin- gering effects of the COVID-19 pandemic on housing supply chain constraints and material costs. Housing starts, a measure of new- home construction, dropped drastically in 2020 when the pandemic started and hasn't caught up to accommodate the demand of a growing population. Housing starts climbed to a season- ally adjusted annual rate of 1.372 million in October 2023, according to the U.S. Census Bureau. The number of units started was up 2% from September 2023 and 4.2% below October 2022. Builder sentiment rose this year as demand increased but high mortgage rates since the end of August continue to NAVIGATING THE REAL ESTATE LOCK-IN EFFECT Why are so many homeowners staying in place? B y M I C H A E L G I F F O R D M I C H A E L G I F F O R D is the CEO and Co-Founder of Splitero and a career real estate expert who witnessed firsthand the lack of resources available to homeowners when they most need to access the value trapped in their home equity. Splitero is a financial technology company that provides homeowners better options to access home equity. By giving a lump-sum of cash in exchange for a share of their home's appreciation, Splitero helps homeowners easily access their equity without income or credit score requirements. Founded by real estate veterans, Splitero has secured more than $1 billion in total financing to help homeowners access their equity. For more information, visit splitero.com.