Morgan Stanley: 70% of Homeowners Locked Into Sub-5% Mortgages

Morgan Stanley says the housing lock-in effect is not going away. About 70% of existing homeowners have mortgage rates below 5%, and one-half have rates below 4%, and these homeowners often find it too costly to move and take on a new mortgage at current higher rates. The trade angle: constrained resale supply, a bid under homebuilders, and continued pressure on transaction-linked names.

The lock-in math

Those owners have no incentive to sell and take on a new mortgage near 6.5%, and that reluctance held existing-home sales at roughly 4.06 million in both 2024 and 2025, the slowest annual pace since 1995, according to National Association of Realtors data.

Rates briefly dipped below 6% in February, the first time in three years, but rebounded toward 6.5% and have remained above 6%, stalling any momentum before it could widen into a broader recovery.

Affordability isn’t coming back

Morgan Stanley Wealth Management modeled three distinct paths for mortgage rates, settling closer to 4%, 5%, or 6%, and across all scenarios, housing affordability will not return to pre-2022 levels.

The base case projects that mortgage payments will decline from about 24% of household income in 2025 to around 21% over the coming decade as rates moderate toward 5% over the long term, but that improvement still leaves affordability well above the roughly 15% average that prevailed in the years after the 2007-2009 financial crisis.

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Supply shifts to new construction

The result is a collapse in housing turnover to the lowest level in roughly 40 years, and with a limited inventory of existing homes for sale, the burden of supply has shifted toward new construction.

That handoff matters. If existing inventory stays frozen, builders capture a larger share of buyers who still need a home, life event or not. Follow more of the story in other news.

Options market and stocks to watch

Watch for builder and housing-adjacent names to trade off the lock-in narrative:

DHI and LEN: Watch for continued demand tailwind if resale supply stays constrained and buyers are pushed toward new builds.

Z and RDFN: Watch for pressure on transaction-based revenue with existing-home sales stuck near multi-decade lows.

HD: Watch for renovation demand as locked-in owners choose to remodel instead of trade up.

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