Locked In and Holding Out: How Low Mortgage Rates Are Freezing the Housing Market

The U.S. housing market is grappling with a persistent shortage of homes, and one major reason is the “lock-in effect.” Homeowners with ultra-low mortgage rates secured during the pandemic are reluctant to sell, even as market demand grows. This hesitance is tightening inventory, driving up prices, and reshaping the dynamics of both buying and selling real estate in 2025.

The Lock-In Effect: A Silent Force Shaping the Market

In 2025, the American housing market is being influenced by an invisible barrier—known as the “lock-in effect.” This term describes a situation where homeowners, having secured historically low mortgage rates in 2020–2021, are now unwilling to sell their homes. With current mortgage rates exceeding 6.5%, many are choosing to hold onto their properties rather than trade their low rates for much higher ones. This is contributing to a serious shortage of homes on the market.

How Ultra-Low Pandemic Rates Created a Housing Freeze

To understand why so many homeowners feel “trapped” in their homes, we need to look back to the early days of the COVID-19 pandemic. In 2020, the Federal Reserve slashed interest rates to support the economy, causing mortgage rates to fall below 3%—a historic low. Millions of Americans locked in those rates by buying or refinancing homes. According to Redfin, over 80% of mortgage holders now enjoy rates below 4%. For these homeowners, selling now would mean accepting a new mortgage at nearly double the interest rate, drastically increasing their monthly payments. As a result, many are choosing not to move.

Low Inventory, High Prices: The Supply Crunch Intensifies

This reluctance to sell has triggered a sharp drop in inventory. The National Association of Realtors reports that active home listings in 2025 are still about 30% lower than before the pandemic. At the same time, demand from buyers remains relatively strong, especially from millennials and Gen Z buyers entering the market. This imbalance is keeping home prices high, even as affordability declines. In competitive cities like Austin, Charlotte, and San Diego, prices continue to rise due to limited supply, despite higher borrowing costs.

Adapting to the New Normal in Real Estate

Both buyers and sellers are changing how they approach the market. Homeowners who do choose to sell often list their homes at premium prices, knowing that competition is tight. Some sellers are also choosing to rent out their homes instead of selling, further limiting available inventory. On the buyer side, many are turning to new home construction, where builders are offering incentives like interest rate buydowns to attract buyers. Others are expanding their home search to more affordable suburbs or rural areas, while some postpone buying altogether in hopes that interest rates will fall.

Beyond Housing: Ripple Effects Across the Economy

The lock-in effect isn’t just a real estate issue—it’s affecting the broader economy. With fewer people moving, job mobility has decreased, making it harder for workers to relocate for better opportunities. Businesses tied to real estate—like moving companies, home inspectors, contractors, and agents—are experiencing a slowdown. First-time buyers, especially, are struggling to find entry-level homes, as current homeowners delay selling. Policy discussions are beginning to focus on potential solutions, such as tax credits for sellers or “portable mortgages” that allow homeowners to transfer their lower rates to new properties.

What’s Next: Can the Market Move Again?

In conclusion, the lock-in effect is one of the key forces shaping the U.S. housing market in 2025. It keeps millions of homes off the market, pushes prices upward, and limits opportunities for buyers and sellers alike. Unless interest rates drop significantly or new policy tools are introduced, many homeowners will remain in place—slowing mobility and maintaining the market’s supply crunch. The challenge now is finding ways to unlock movement and restore balance to the housing ecosystem.

Dan Hegstrand

Remax Advantage Plus

11806 Aberdeen St NE Suite #100 Blaine, MN 55449

Email: danhegstrand@remax.net

Phone: (612) 325-6768

Realtor Since 1989
Experience doesn’t cost, it saves!
Re/Max Advantage Plus, GRI
I am celebrating my 35th year as a full-time Realtor in the Twin Cities and surrounding areas! I am your Realtor for all of your Twin Cities residential real estate needs. Call or text 612-325-6768, or email me at DanHegstrand@Remax.net today to get the most out of your real estate experience.
Sellers: Today’s market is still very strong with low inventory and despite higher interest rates it is still a seller’s market. Some sellers are receiving multiple offers over their asking price. It is important to have an experienced Realtor on your side so that you maximize your net return. I’ll make sure your home is viewed by thousands of potential buyers versus selling it in-house where you give up exposure to all potential buyers costing you thousands of dollars. If you are you considering selling your home within the next 1-6 months please contact me to come view your home for a no-cost evaluation.
Buyers: Having a knowledgeable Realtor on your side to expose you to all of the homes available in your market gives you more to choices. Use my 35 years of experience to help you find your dream home. If you are interested in viewing properties online as soon as they enter the market, let me know. We will set up an email search for you that is faster and more accurate than other online home searches. Your email search can be set up right away just by contacting me!
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