Big changes in life, corporate switcheroos from working-remotely-forever to return-to-the-office, job changes, natural disasters, etc., force their hand.

By Wolf Richter for WOLF STREET.

The share of mortgages outstanding with rates below 3% – as close to free money as regular folks could get – has been declining slowly but steadily to 21.3% of all mortgages outstanding at the end of Q3 2024, from the peak in Q1 2022 (24.6%), according to the Federal Housing Finance Authority’s National Mortgage Data Base of all mortgages (blue in the chart below).

The share of mortgages with rates below 4% has dropped to 55.2% of all mortgages outstanding at the end of Q3 2024, from the high of 65.1% in Q1 2022 (red). This is the share of the total number of mortgages outstanding, not of mortgage balances.

The share of adjustable-rate mortgages dropped to just 2.3% of all mortgages outstanding in Q3, after the spike in interest rates pushed the adjustable rates higher (from a share of over 10% a decade ago). Some ARMs had rates below 3% before 2020, which is why the blue line is above zero before 2020; those were ARMs. And those folks experienced a payment shock when rates began to rise in 2022.

The “locked-in effect” has bedeviled the US housing market ever since mortgage rates went back to the old-normal levels in the era before QE, before 2009. This effect describes a feeling of homeowners with mortgage rates that are well below the current rates, such as 30-year fixed-rate mortgages with rates below 4% and even below 3%. These homeowners obviously rejoice in the deal they got, and many swear up and down that they will never ever give it up.

But they’re also somewhat handicapped if they want to sell their house to buy a different house that they then have to finance at a much higher mortgage rate. Doing the math leads to payment shock.

The real estate industry laments this locked-in effect because it removes those locked-in homeowners both as buyers and as sellers from the market. This explains part of the plunge in demand to where in 2024, sales of existing homes plunged to the lowest volume since 1995, despite sharply rising inventories. This is terrible for the real estate industry and for mortgage lenders and brokers because they earn commissions and fees from each transaction.

But some locked-in homeowners nevertheless sell their homes and pay off their low-interest-rate mortgages for a variety of reasons – big changes in life (divorce, death, etc.); corporate switcheroos from working-remotely-forever to return-to-the-office; new jobs in different cities; natural disasters that destroy the existing homes, etc.

And suddenly, a home with a low mortgage rate has to be sold, or has to be refinanced, and the old mortgage is paid off, and a new mortgage at a much higher rate is taken out.

6%-plus mortgages. Conversely, the share of mortgages outstanding that have rates of 6% and higher has more than doubled to 17.2% at the end of Q3 2024, the highest since Q3 2016, from a share of 7.3% at the low point in Q2 2022.

Obviously, this share of 17.2% is still very low. But the share more than doubling in two years is a rapid increase. It reflects purchase mortgages and refinance mortgages with rates of 6% or higher.

The average 30-year fixed mortgage rate is currently just over 7% and has been above 6% since September 2022, according to Freddie Mac data.

The below-3% 30-year fixed-rate mortgages occurred only during a short period from mid-2020 to late 2021 (red box), triggering an enormous refinancing boom that by Q1 2022 caused nearly a quarter of all outstanding mortgages to have rates of less than 3%.

The 30-year fixed-rate mortgages with rates below 4% occurred periodically starting in 2012 during the era of QE when the Fed bought bonds, including large volumes of Mortgage-Backed Securities to repress mortgage rates.

So these below-4% mortgages are not forever. At some point, “locked-in” homeowners find themselves in a position where they want to, or have to, pay off the old mortgage and take out a new mortgage at a much higher rate. And eventually the locked-in effect begins to fade.

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