You might be eager to buy a house, but homeowners are holding tight to their mortgage

Too many homeowners have cheap mortgages worth holding on to, which is a problem for the housing market.

In addition to high mortgage rates and high home prices, a lack of existing homes for sale keeps new buyers waiting. In a recent CNET Money survey, 13% of U.S. adults said having access to more inventory would help them consider buying a home.

The limited supply of housing is due in part to the “price lock-in effect.” Homeowners who maintained historically low mortgage rates at the start of the pandemic can’t afford to increase (in some cases, double) the interest rate on their home loans, so they’re staying put.

Fewer sellers mean fewer options for buyers looking for a home in the market. “It’s brutal, it’s really, really hard,” says Maja Sly, a broker at Keller Williams.

The Federal Reserve’s recent interest rate cut, which has already translated into lower mortgage rates, raises hopes that more homeowners will start packing up and moving, which could open up more inventory.

Learn more: Cheaper Mortgages Are Coming, But How Long After the Fed Rate Cuts?

Limited housing inventory and high housing prices

The rate lock effect leads to depressed housing supply in several different ways. Some homeowners with low interest rates simply don’t to want sell their house, even if they can afford to buy a new one.

But more often than not, persistent inflationary pressures and the high cost of living make it impossible for many homeowners to move, even if they want to, according to Sly. For example, those with a 2.5% interest rate would see their mortgage payments skyrocket if they purchased a comparable home today, and not just because of current rates. House prices have also increased by 47% since the start of 2020.

“Housing prices and inflation have really outpaced incomes,” Sly says.

In the CNET Money survey, 45% of U.S. adults said falling housing prices would play a role in their decision to buy a home. In other words, buyers are sensitive to high listing prices and homes aren’t selling off, says Vickey Barron, a broker at Compass.

Additionally, prices are caught in the crosshairs of supply and demand: with many buyers and few homes available, prices rise. Sly says many sellers feel they can raise prices even if the quality of the home doesn’t justify it. And sometimes they can get away with it, especially if people move from high-priced markets to cheaper cities and don’t mind paying.

Another major problem for the real estate market? Sellers are usually also buyers. So even when the rate lock-in effect subsides, sellers looking for homes to sell could increase competition and drive up prices.

Of course, the other side of the housing stock equation is new housing construction. Over the past year, newly constructed homes have become an increasingly popular option for buyers who can afford them.

Read more: Mortgage rates aren’t the only obstacle for home buyers. There aren’t enough houses

What will it take for owners to start selling?

Although the 0.5% rate cut decided by the Fed in September is good news, experts agree that it is not enough to get the real estate market out of this impasse.

“It’s very positive, but it’s not going to be a tsunami of (sellers) now,” Barron says.

Fed Chairman Jerome Powell acknowledged this in his September 18 remarks following the rate cut. “As rates go down, people will start moving around more, and that’s probably already starting to happen,” he said.

But he warned that the bigger problem is that the country is not building enough new housing to increase overall supply, which would also ease pressure on house prices. “This is not a problem the Fed can really solve,” Powell said.

Sly said mortgage rates will need to get back down into the 4% range for people to start selling and moving into new homes. Half of U.S. adults surveyed in the CNET Money survey said a mortgage rate of 4% or less would allow them to realistically consider buying a home or refinancing.

And 29% of respondents said there was no mortgage rate that would allow them to realistically consider buying or refinancing a home. This highlights the challenges posed by low inventory, high house prices and inflation, regardless of interest rates.