ICE Mortgage Monitor examines the lock-in effect and its impact on inventory

Intercontinental Exchange released its April 2024 ICE Mortgage Monitor Report this week, which provides an analysis of rates in the current high interest rate environment.

Specifically, the ICE Research and Analysis team, led by Andy Walden, vice president of enterprise research strategy, probed what kind of interest rate declines would be needed to shake loose more inventory from homeowners locked into low rates.

“Leveraging the ICE Home Price Index and our loan level mortgage data, we looked at how much it would cost the average homeowner with a mortgage to trade up to a 25 percent more expensive home in today’s market – or to simply move across the street, for that matter, into a home identical to their own. The results were bracing, to say the least,” Walden said.

It found that the average homeowner’s mortgage payment would more than double, to gain just 25 percent in property value.

“That said, you’d be hard-pressed to find a more vivid illustration of the lock-in effect that’s kept for sale inventory in a hole for the last few years. Simply giving up their current rate to move across the street to an equivalently priced home in today’s market would result in a nearly 40 percent increase in P&I, an average of $500 more per month. Lower rates would ease the calculation for many and make moves more reasonable. But the net result continues to be too few homes for too many buyers. Until that fundamental mismatch is addressed, simple supply and demand will continue to press on both inventory and affordability,” Walden said.

However, while inventory remains constricted, there have been some signs of improvement, according to ICE. While still 40 percent below pre-pandemic averages, February’s inventory deficit was the shallowest of any February since 2020. Inventory levels rose in 60 of the 100 largest U.S. markets in the month, with 65 percent of major markets having more homes available for sale today than they did at the same time last year.

Home sales hit an 11-year low at the end of 2023, but they have begun to improve over the last two months as mortgage rates have come down.

The lock-in effect on inventory varies significantly across geographies. The cost to give up an existing mortgage and buy a 25 percent more expensive home ranges from a low of a 72 percent payment increase in Buffalo, N.Y., to more than 140 percent in Los Angeles and San Jose.

“Mortgage rates need to come down to dislodge the lock-in effect,” Walden concluded. “Since most factors influencing 30-year rates are out of lenders’ control, they need to be able to find ways to compress spreads without simultaneously compressing their own profit margins. That’s key to our mission at ICE – identifying and eliminating inefficiencies in housing finance through technology while finding smarter, faster, cheaper, and more transparent ways to originate loans and increase liquidity.”

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