If you’ve been trying to buy a home and feel like there’s nothing on the market, you’re not imagining it.

Today I want to talk about something called the lock-in effect — what it is, why it happened, and how it’s impacting buyers across the country right now.

You’ve probably seen headlines saying inventory is improving. And in some places, that’s true. But in many areas, especially where there isn’t a lot of new construction, inventory is still extremely tight. The lock-in effect is a big reason why.

What Is the Lock-In Effect?

The lock-in effect is a result of historically low interest rates from 2020 through 2022.

During that period, millions of homeowners bought or refinanced at rates in the 2%–3% range. Those rates were incredible — and they changed homeowner behavior in a big way.

Here’s what the data shows right now:

• About 20% of homes in the U.S. have mortgage rates under 3%

• Roughly 70% of homeowners have rates under 5%

• Around 52.5% still have rates under 4%

That matters because current mortgage rates are nowhere near those levels.

So when homeowners look at selling and buying another home, the payment shock is massive. Even if they can technically afford the new payment, it feels painful to give up a rate that low, both emotionally and financially.

That’s the lock-in effect.

People are essentially “locked” into their homes because their current mortgage feels too good to give up.

Why Low Rates Broke the Housing Ladder

In a normal housing market, there’s a natural flow:

• First-time buyers purchase starter homes

• Those homeowners move up to larger homes

• Older homeowners downsize

• Inventory circulates

Right now, that ladder is broken.

People who would normally move up aren’t moving because their payment would jump dramatically. Retirees who would normally downsize aren’t moving either — especially in high-cost states — because the math no longer works.

That means fewer homes hit the market, which hurts buyers at every level.

“Golden Handcuffs” Are Real

I hear this all the time:

“We only planned to stay here a couple of years, but the rate is so low we can’t justify moving.”

Even when buyers want a bigger home, a different area, or a lifestyle change, that ultra-low payment becomes addictive. It feels irresponsible to give it up.

That’s why inventory is especially tight in areas without heavy new construction. New builds are where you’re seeing inventory increase — not resale homes.

So What Actually Fixes the Lock-In Effect?

We’ve identified the problem. Now let’s talk about possible solutions.

1. Lower Mortgage Rates (Carefully)

Yes, lower rates would help.

But there’s a big caveat.

If rates dropped back into the 2s or 3s across all buyer types — owner-occupied, second homes, and investors — we’d likely see another buying frenzy like 2020–2022. That would make affordability even worse.

However, if rates moved into the low-to-mid 4% range for owner-occupied homes, that could encourage more homeowners to move without creating panic-level competition.

It’s a balance.

2. Capital Gains Tax Relief

This is one of the most overlooked issues.

In high-cost areas like California, many older homeowners have most of their wealth tied up in their homes. The capital gains exclusion hasn’t meaningfully increased in years, and selling can trigger enormous tax bills.

That discourages downsizing and relocation.

Temporary or targeted capital gains relief could unlock inventory quickly, especially in expensive markets.

3. Government Intervention (Not a Quick Fix)

This sounds far-fetched, but it’s not unprecedented.

During the 2008 housing crisis, homeowners couldn’t refinance because they lacked equity. The government stepped in with programs like HARP to fix that problem.

Could something similar happen to address lock-in? Possibly — but it would take time, coordination, and political will. It’s not a fast solution.

4. Time (The One Nobody Likes)

This is the solution we’re already seeing.

Life happens.

People get divorced. They change jobs. Families grow. Eventually, even the best rate won’t keep someone in a home forever.

We’ve already seen the percentage of homeowners under 4% slowly decline since 2022. That means lock-in is easing — but very gradually.

What This Means for Buyers Right Now

If you’re in an area with very little inventory, the lock-in effect is likely the reason.

It’s not that sellers don’t exist — it’s that many don’t want to give up what they have. Understanding this helps buyers plan realistically, especially for 2025 and 2026.

This is also why you’ll hear analysts talking about inventory constraints for years to come, even if demand cools.

Final Thoughts

The lock-in effect is one of the biggest forces shaping today’s housing market.

The fastest levers to fix it are moderate rate reductions and capital gains tax relief. Government programs could help, but they wouldn’t be immediate. And time will continue to slowly loosen things, whether we like it or not.

If you’re frustrated by low inventory, now you know why — and more importantly, how to plan around it.

We’re Here to Help

If you want help understanding how the lock-in effect impacts your specific situation, or you’re trying to plan your next move in a tough inventory environment, we’re here for that.

These conversations are always free and focused on helping you build a smart plan.

We Are Here For You! 🙂
Call or Text Me Here – (786) 933-2077

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