At last, there’s some good news for builders! The mortgage-rate lock-in effect, which has recently represented one of the biggest headwinds for builders, is probably past its peak and should gradually weaken over the next few years. This is especially likely now that government-backed buyers are back in the MBS market and more homeowners have 6% rates than “never-sell-this” 3% loans. For builders and developers, that shift matters a lot, it means a more fluid resale market, fewer contingent “house-to-sell” buyers who can’t get traction and a more normal move-up pipeline feeding into new-home demand.​

The rate lock-in story is familiar by now, people sitting on ultra-cheap mortgages are reluctant to give them up, which freezes listings and keeps would-be new-home buyers stuck in place. For builders, that has translated into fewer organic move-up buyers able to sell their existing home quickly and roll equity into a new build.​ More “house-to-sell” contingencies that never cleared because the resale simply wasn’t getting offers in a thin inventory-but-thin-demand environment.​ A heavier reliance on rate buydowns and incentives to get buyers comfortable jumping from a 3% to something in the 6–7% range.​

The directive for Fannie Mae and Freddie Mac to buy around $200 billion in mortgage-backed securities will bring down mortgage rates, but it will likely be necessary for the Fed to follow suit if they are to stay down.This may happen in the next few months, under a new Fed Chair. For builders and developers, look for slightly lower prevailing mortgage rates make monthly payments less painful for buyers trading up from a 3%–5% loan, even if those payments are still higher than their current ones and less volatility in rates helps buyers and sales teams plan. Expect fewer “I need to think about it until the Fed meets again” moments killing urgency in the sales office.​

For builders, one of the most tangible benefits of slightly lower rates and a more “normal” rate distribution is what it does to the resale market that sits upstream of your sales offices. When mortgage rates come off their highs and more buyers can stomach today’s payment levels, resale demand improves, days on market shorten and that stuck move-up owner in another ZIP code suddenly has a realistic path to sell.​

This directly eases the “house-to-sell” issue. Buyers who want a new-build but are contingent on selling their current home are more likely to get multiple offers or at least one clean offer in a reasonable time frame, so contingencies actually clear instead of lingering for months.​Higher confidence in resale liquidity makes buyers more willing to sign on to a to-be-built home earlier in the process, because they don’t fear being stranded with two mortgages or a forced fire sale.​ Builders can structure more aggressive contingency programs or limited-time incentives tied to successful sale of an existing home, knowing that the resale market can realistically perform.​

As resale inventory gradually unlocks, there is also a compositional benefit, more trade-up listings in established neighborhoods can attract fresh entry-level buyers, while those sellers then turn to new construction for their next home. 

All that said, this is not a clean, overnight fix. A majority of borrowers are still sitting on sub-4% mortgages and even with rates coming down, some will still sit tight. 

For builders and developers, the practical implications may look like assuming a gradual healing in resale-driven demand rather than a flood. While absorption should improve, the move-up pipeline is still partially constrained. Expect substantial regional variation, markets with strong job growth and more elastic land use are likely to see a faster easing of lock-in and stronger new-home demand than tightly regulated, high-tax coastal metros.​ Plan communities, product lines and incentives around the idea that many buyers will still be payment-sensitive with smaller but smarter floor plans, attached product and creative financing (temporary buydowns, extended rate locks) will remain helpful even as lock-in pressure eases.​

In short, lower mortgage rates helped along by renewed government MBS buying, combined with a mortgage pool that is slowly shifting from 3% to 6%, should gradually thaw the resale market and reduce the “house-to-sell” choke point that has been holding back new-home demand. 

By Brad Hunter. He is the Founder of Hunter Housing Economics. He may be reached at brad@hunterhe.com . 

This column is featured in the February issue of Builder and Developer, read the print version here.