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locked in and locked out
The effect of mortgage rates on buyers and housing transaction activity is well understood. Naturally, as borrowing costs rise, more would-be purchasers are discouraged from entering the market. In the same way, as rates fall, demand increases as previous financial calculations that did not pencil now do so.
Less frequently discussed, though just as well documented, is the effect rates have on sellers. One such consequence is termed the “lock-in effect,” where current homeowners are reluctant to sell because it would mean giving up their low mortgage rate for a significantly higher one. In King County, despite three years of below-average sales activity, housing inventory has only recently begun to accumulate. The lock-in effect is likely playing a role here, keeping the supply of homes tighter than it otherwise would be.
In this way, mortgage rates impact both sides of the housing supply-demand equation. One method to quantify this impact is to look at mortgage originations, which is the amount of new debt that banks issue to consumers (including refinancing). High origination volumes signal a busy, competitive market.
Between 2020-2022, originations in the US measured an average of $175B per quarter, driven by a surge in refinancing and housing activity amid the low-rate environment. That figure has since dropped to just $50B per quarter from 2022 through 2024, an 80% decline. While the earlier period was unusually active, the sharp drop suggests a substantial portion of market participants are effectively locked-in and not re-engaging.
HOUSE ARREST
DATA: LARGE BANK CONSUMER MORTGAGES: NEW ORIGINATIONS, UNITED STATES
SOURCE: FEDERAL RESERVE BANK OF PHILADELPHIA, FEDERAL RESERVE BANK OF ST. LOUIS
it’s what’s inside that counts
Despite interest rates remaining historically elevated, the rate distribution of outstanding mortgage debt in the US is actually the healthiest it has been in decades.
At times, debt obligations can be viewed as a leading indicator for the broader economy. Debt is funny that way—you don't really notice it until it becomes a problem. Yes, labor markets are strong right now and households generally feel secure. But should things take a turn, how much you owe (and the interest you're paying) suddenly matters a lot. The higher your obligations, the more vulnerable you are when economic conditions shift.
Since mortgages constitute the majority of American consumer debt, understanding their rate distribution is particularly valuable. For example, average 30-year mortgage rates were slow to fall following the 2008 housing crisis, and as a result, by 2015, 65% of loans in Washington State carried interest rates above 5%, while only 6% had rates below 3%. This meant households were, on average, paying significantly more in interest to service their mortgage debt.
By 2020, this distribution had become more balanced as interest rates dropped. The share of high-interest loans had fallen (33%), and the majority of mortgages (60%) were in the more manageable 3-4.99% range.
Surprisingly, even with interest rates at historic highs, today’s mortgage profile looks healthier than it has in decades. Millions of households took advantage of the low-rate window in 2020-2021 and locked in lower costs. Nearly a quarter of outstanding mortgages now have rates below 3%. At the same time, the share of high-rate loans has barely changed since 2020. As a result, the average effective mortgage rate remains unusually low, creating breathing room for households and leaving them in a stronger position than headlines may suggest.
A HEALTHY MIX
DATA: DISTRIBUTION OF OUTSTANDING CONVENTIONAL RESIDENTIAL MORTGAGE LOANS, 2015-2025, WASHINGTON STATE
SOURCE: FHA NATIONAL MORTGAGE DATABASE
on borrowed time
Debt delinquency levels are rising and are above long-term averages. Though they aren't yet a cause for concern, this is something to watch moving forward.
In the last section, we discussed mortgage debt as a barometer of the health of household balance sheets. But it’s important to note that typically, mortgages lag other delinquency rates. In other words, when conditions are more difficult, households will make sure they make their mortgage payments ahead of other repayments, such as car loans and credit cards.
This means we should also look to these other categories if we want to spot the earliest signs of strain in household budgets. Indeed, both auto and credit card debt have seen a steady rise since the pandemic and are now well above long-term averages. For reference, 30-day credit card delinquency typically hovers around 6-7%. During the pandemic, due to a combination of government stimulus and less consumer spending, this fell to as low as 4.1%. But today, this rate stands at 9.0%, an early sign that some households are beginning to struggle to manage their revolving debt.
Current levels merit attention but need not cause alarm just yet. The overall mortgage delinquency rate is at 3.6%, which is just above the 10-year average of 3.0%. In the coming months, should current conditions persist, expect the mortgage delinquency rate to rise. How high and how sustained a rise this becomes will be the ultimate determinant of housing market soundness.
LATE BUT NOT LOST
DATA: SELECT TYPES OF DEBT, NEWLY 30-DAYS OR MORE DELINQUENT, 2015-2024, UNITED STATES
SOURCE: FEDERAL RESERVE BANK OF NEW YORK, QUARTERLY REPORT ON HOUSEHOLD DEBT AND CREDIT FEBRUARY 2025
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03. credit & debt
The stark contrast in mortgage origination volume as interest rates have risen highlight the lock-in effect, which is keeping inventory levels relatively low.
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