The mortgage 'lock-in' effect is here to stay and home prices won't fall for years to come, research firm says

• Easing mortgage rates won't fully unwind the "lock in" effect, Capital Economics said.
• Home moves and market activity will remain muted even if borrowing costs become more attractive.
• Rising buyer demand and low inventory will drive prices 5% higher this year, the firm said. 

The frozen US housing market may not fully thaw for years to come, according to Capital Economics. 

Since the pandemic housing boom, a combination of near-7% mortgage rates, low inventory, and high home prices has created a "lock-in" effect, making current homeowners unwilling to move because it would require taking on a new, higher mortgage rate. That in turn keeps many buyers and sellers from participating in the market. 

In a note Tuesday, the firm said easing mortgage rates won't be enough to spark a meaningful uptick in homebuying activity, and that there's no end in sight for rising home prices.

"Even if mortgage rates fall to 6% as we expect, mortgage rate 'lock in' will continue to curb home moves," Capital Economics strategists said. "As a result, we only anticipate a trickle of new resale supply coming onto the market over the next few years."

Capital Economics forecasts a 5% rise in house prices this year, higher than the consensus 3% jump. In the research group's view, housing market activity will remain muted as competition for homes stays tight and affordability remains historically low.

The strategists expect mortgage rates, too, will continue to trend above pre-pandemic levels. Easing Fed interest rates and reduced market uncertainty could help bring mortgage rates to 6.5% by the end of 2024, and 6.0% by the end of 2024.

That said, Capital Economics doesn't expect dramatic changes as far as how much it costs Americans to afford monthly home payments.

Mortgage payments as a share of income hovers at 25.7% currently, and the strategists said that could fall to 23.1% by the end of next year, as illustrated in the chart below.

"The bigger picture is that the market will remain practically frozen," the Capital Economics team said. "The biggest constraint on activity in recent years has been the lack of available homes for sale due to mortgage rate 'lock-in.' We don't expect that to change much."