According to a recent report by Freddie Mac, homeowners with low mortgage rates are reaping significant savings due to the "lock-in effect." As of October 2023, these homeowners have collectively secured an impressive $800 billion in savings. The report reveals that approximately 60% of mortgage holders currently enjoy rates of 4% or lower.

The surge in savings can be attributed to the combination of elevated mortgage rates and a scarcity of housing listings. Homeowners with favorable mortgage rates are finding their properties to be increasingly valuable, as they are hesitant to sell their homes in the current market climate.

In December alone, U.S. homeowners with mortgage rates below the national average of 6.67% saved an average of $66,000 by opting not to sell their homes. This amounts to a higher figure compared to the $55,000 estimated by Freddie Mac in July. Consequently, it is estimated that the total savings accumulated by "locked-in" homeowners amounts to an astounding $800 billion as of October.

The prevailing high interest rates have incentivized many homeowners to hold onto their properties, leading to lower housing inventory levels and a decline in existing home sales. In fact, existing home sales in the fall plummeted to their lowest levels since 2010. Despite a recent decrease in mortgage rates from historic highs, the housing market continues to be adversely impacted, as indicated by the Freddie Mac report.

Fortunately, the decrease in rates has brought some respite to the housing market. The Freddie Mac report noted an increased interest in home purchase applications, which surged by 15% between mid-October and early December. However, the report also underscores that the demand remains vulnerable and heavily dependent on fluctuations in mortgage rates. To sustain the recovery of the purchase demand, rates would need to further decrease.

Another factor contributing to the landscape of the housing market is the steady rise of housing prices. In October, Freddie Mac recorded a monthly growth rate of 0.8%, surpassing the pre-pandemic average of 0.4%. The report's findings align with other recent data, such as the Case-Shiller Home Price Index, which reported the fastest growth rate in housing prices throughout the year in October.

Nonetheless, concerns regarding the overvaluation of properties persist. Fitch Ratings agency reported that U.S. homes were overvalued by up to 9.4% in the second quarter of 2023. The report further highlighted that 88% of the country's metro areas were experiencing overvaluation. Fitch Ratings predicts that this trend of overvaluation will continue into the third quarter.

With homeowners benefiting from significant savings through the "lock-in effect," the housing market maintains a delicate balance between high savings for some and concerns of overvaluation. Moving forward, the trajectory of mortgage rates and housing prices will play a crucial role in shaping the overall health of the housing market.