For many homeowners considering moving, the math is simple. Trading a mortgage rate of 3% for a 6.5% person doesn’t add up, so they’re stuck in their position – increasing the cost of housing in the process.
This phenomenon is called the “lock-in” effect, and it has its roots in the very low interest rates that were common during the crisis. Basically, homeowners bought property so cheap during the COVID period that they now feel trapped, unwilling to sell or buy because their mortgage will be too high. According to a recent white paper from the National Bureau of Economic Research, the effect of the foreclosure had a significant impact on housing supply, demand and prices.
About 80% of all homeowners have less than 6% value at the beginning of the year, according to data from Realtor.com. Many real estate experts agree that the national average mortgage rate in the 5% range is likely to create more work for sellers.
But current mortgage rates are still in the mid-6% range, meaning homeowners are looking at a scary low.
“It’s a lot easier to go from 4% to 5.5% than it is to go from 4% to 6.5%,” Melissa Cohn, regional vice president of William Raveis Mortgage, told Money.
As a result, many homeowners who still move, Cohn adds, do so because they need to as part of the life cycle, such as a new job or a growing family.
While most of the foreclosure effect has focused on mortgage rates, there is another little-known factor that has caught some homeowners off guard. Nadia Evangelou, chief economist at the National Association of Realtors (NAR), says many homeowners may be overwhelmed by the capital gains tax they have to pay on selling their homes.
Under current IRS guidelines, a single home seller can claim a tax exemption of up to $250,000 on the sale of the home (the exemption doubles to $500,000 for married couples). While these numbers may sound reasonable, they no longer match the reality of today’s home prices.
These exemptions were set in 1997, when the median home price was $129,000, according to the NAR. The margin at the end of 2025 has more than tripled to $419,300, thanks in large part to the price advantages of the pandemic period.
“At that time, these limits were open, but they did not keep pace with inflation,” said Evangelou, adding that this is why many experts advocated raising the exemption to $500,000 for single home sellers and $1 million for couples.
The NAR estimates that 33% of current homeowners may have more equity in their homes than their earned income, which means they’ll have to pay a significant amount in taxes when they sell — and they’ll get less profit on the sale. That percentage is expected to increase to 56% by 2030.
How a mortgage ‘lock-in’ rate increases rents
One of the biggest impacts of lock rate is, of course, on inventory. According to Angelou, 85% of all real estate for sale is existing homes, not new construction.
A healthy market will have a steady increase in pre-owned homes. But when owners are locked in, there’s less leverage, and the mobility rate among prospective buyers — their ability to upgrade, downsize or enter home ownership for the first time — declines. This lack of movement is a sign that fewer homeowners are selling, or because they are constrained by their value or potential tax burden.
The lack of real estate, in turn, affects house prices. A recent NBER working paper found that a foreclosure period results in a 4.4% increase in home prices, added to any other upward price pressures, such as buyer competition and bidding wars.
While home buyers get a lot of attention, renters are also affected by the foreclosure effect. With fewer homes for sale, those looking to buy homes priced out of the market are turning to rental properties. This increased demand creates more competition among tenants and puts upward pressure on prices.
Research shows that rents increase by 1.5% compared to times when the real estate market is not locked.
The effect is also seen in older homeowners and empty nesters, who may prefer to downsize to a smaller home as they age. However, due to the high quality of the property and potential tax implications, they prefer to stay in their homes. This has been the case it led Fewer homes are available for younger buyers looking to move in or move up, creating a greater demand for homes that are not readily available on the market.
The NBER paper estimates that the lock-in effect reduces borrower mobility by 25%.
Solving the problem is easier said than done. Adding more inventory can help open up the market. New construction can help cover some of the supply shortfall, but it takes time and cannot close the existing gap on its own.
More existing homes are needed to bring the market into better balance. But as long as many homeowners feel locked into their current mortgage rates, housing activity may remain sluggish, especially for first-time and low-income buyers who feel cut off from homeownership by high mortgage rates and prices.
