For many homeowners considering moving, the math is simple. Trading a 3% mortgage rate for a 6.5% one doesn’t add up, so they’re staying put instead — and increasing housing costs in the process.
This trend is called the “lock-in” effect, and it has its roots in the extremely low interest rates that were common during the pandemic. Basically, homeowners bought such cheap property during COVID that they now feel trapped, unwilling to sell or buy because their new mortgage rate would be significantly higher. According to a recent white paper from the National Bureau of Economic Research, the lock-in effect has had a major impact on housing supply, demand and prices.
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Close to 80% of all mortgage holders had a rate below 6% at the start of the year, according to data from Realtor.com. Most housing experts agree that a national average mortgage rate in the mid-5% range is likely to create more seller activity.
But current mortgage rates are still in the mid-6% range, meaning homeowners are staring down an intimidating jump.
“It’s much 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, tells Money.
As a result, most homeowners who are still moving, Cohn adds, are doing so because they need to as part of a life-cycle event, such as a new job or a growing family.
While most of the focus of the lock-in effect has been on mortgage rates, there is another, lesser-known factor holding some homeowners back. Nadia Evangelou, principal economist at the National Association of Realtors (NAR), says that many homeowners may also be constrained by the capital gains tax they would have to pay on the sale of their home.
Under current IRS guidelines, a single home seller can claim a tax exemption of up to $250,000 on the sale of a home (the exemption doubles to $500,000 for couples). While these numbers may sound more than reasonable, they no longer fit the reality of today’s home prices.
These exemption caps were set in 1997, when the median home price was $129,000, according to the NAR. The median at the end of 2025 had more than tripled to $419,300, thanks in large part to pandemic-era price gains.
“Back then, these limits were generous, but they never adjusted for inflation,” Evangelou says, adding that’s why many experts advocate for 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 the capital gains exclusion amount, meaning they will have to pay a significant amount in taxes when they sell — and will receive less profit from the sale. That percentage is expected to increase to 56% by 2030.
How the mortgage rate ‘lock-in’ drives up rent
One of the major impacts of the lock-in rate is, of course, on inventory. According to Angelou, 85% of all home sales are existing homes, not new construction.
A healthy market will have a consistent turnover of previously owned homes. But when owners are locked in, there is less turnover, and the mobility rate among prospective buyers — their ability to upsize, downsize or enter homeownership for the first time — decreases. This lack of mobility is a sign that fewer homeowners are selling, either because they’re locked in by their rate or their potential tax burden.
The lack of homes for sale, in turn, impacts home prices. A recent NBER working paper found that a period of mortgage rate lock-in results in an aggregate home price increase of 4.4%, which is added to any other upward price pressures, such as buyer competition and bidding wars.
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While homebuyers get most of the attention, renters are also affected by the lock-in effect. With fewer homes for sale, prospective homebuyers who are priced out of the market turn to rental properties. This increased demand creates more competition among renters and exerts upward pressure on prices.
The research shows that rents increase by 1.5% compared with periods when the for-sale market is not locked in.
The effect is also evident among older homeowners and empty nesters, who might prefer to downsize to a smaller home as they age. However, due to the high-rate environment and potential tax implications, they opt to remain in their homes. This, in turn, has led to fewer homes available for younger buyers looking to move in or move up, creating higher demand for homes that aren’t readily available on the market.
The NBER paper estimates that the lock-in effect reduces a borrower’s mobility by 25%.
Solving the problem is easier said than done. Adding more inventory can help unlock the market. New construction would help cover some of the supply deficit, but it takes time and can’t make up for the current gap on its own.
More existing homes are needed to bring the market into better balance. But as long as most homeowners feel locked into their current mortgage rates, housing activity is likely to remain sluggish, especially for first-time and moderate-income buyers who feel they are frozen out of homeownership by high rates and home prices.
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