The 'lock-in' effect is heating up home prices

Prospective homebuyers felt the heat in the second quarter as home prices continued to creep up, with current homeowners staying put. 

The average price for single-family properties rose 1.9% in the second quarter compared to the prior period, and was up 3.0% from the same time last year, according to Fannie Mae's Home Price Index. Appreciation was slower than the first quarter's revised annual growth rate of 4.9%, but its rise still bucked industry expectations, said Doug Duncan, Fannie Mae chief economist. 

"Moreover, the 'lock-in effect,' in which homeowners are disincentivized to list their homes for sale because of how high mortgage rates have risen, is seriously inhibiting the supply of existing homes available for sale," he said in a press release Monday.

The 30-year fixed rate mortgage is sitting just below 7%, according to Freddie Mac. Cooling inflation could depress rates, although experts still predict a short-term rate hike at the next Federal Open Market Committee meeting. 

As the housing market awaits new supply, homeowners continue to sell their properties above asking price. Homebuilders are eager to fill the nation's dearth of inventory, and construction costs haven't risen on a monthly basis since March, the National Association of Home Builders reported.

Duncan said the past quarter's 8% seasonally adjusted annualized home price growth was well above the historical average. The GSE's Index, published since 1975, aggregates county-level data and excludes condos. Year-over-year home price growth nearly hit 20% at the beginning of last year but has since plummeted, and was last in double digits in the third quarter last year. 

Other home prices analyses suggest a better environment for prospective buyers, as CoreLogic found annual home price declines across Western states and some East Coast cities. 

Democratic lawmakers on Capitol Hill recently revived accusations that investors are to blame for the pricey market, introducing proposed tax breaks for corporations buying homes. Redfin data in June showed investors retreating from the market after a massive pandemic-era spending spree.

Duncan said the GSE anticipates near-term home price appreciation if rates continue to trap homeowners. 

"Unfortunately, any hopes of a better-balanced home supply situation may rest on the ability of homebuilders to meet ongoing demand," he said.