How the Lock-In Effect Could Prolong the Housing Downturn—and Why REITs Still Offer Hope

The U.S. housing market's sluggish recovery has become a recurring theme for investors, with stubbornly high mortgage rates and stagnant price growth keeping homeowners and buyers in limbo. At the heart of this stagnation lies the lock-in effect: millions of homeowners are effectively “stuck” in homes with mortgages issued during the pandemic's ultra-low-rate era, unable or unwilling to sell without facing steep financial penalties. This dynamic isn't just slowing the housing rebound—it's creating a hidden opportunity in residential REITs, particularly those focused on multifamily housing. Here's why.

The Lock-In Effect: Why Homeowners Won't Budge

The average 30-year fixed mortgage rate has hovered near 6.7% in recent weeks, down slightly from January's peak of 6.96% but still nearly triple the 2.65% rates seen in early 2021.

. For homeowners who refinanced during the pandemic, today's rates mean selling their home could require taking out a new loan at double the interest rate—or swallowing the difference in equity.

This math has kept many homeowners sidelined. According to Freddie Mac, fewer sellers are entering the market, even as buyers gain modest negotiating power. But here's the catch: without sellers, buyers can't move up, creating a self-reinforcing cycle of low inventory and stagnant prices. The result? A prolonged housing downturn, with national home prices expected to decline 0.5–1% annually through 2025, per CoreLogic forecasts.

Why the Lock-In Effect Matters for Investors

The lock-in effect isn't just a homeowner problem—it's a structural challenge for the broader housing market. Reduced mobility means:
- Limited inventory: Buyers face fewer options, which caps price growth but also slows transaction volumes.
- Slower turnover: The lack of sellers stifles market liquidity, making it harder to gauge true demand.
- Rental demand surges: With homeowners stuck in place, renters—particularly younger demographics—dominate the market.

This last point is critical. While homeowners are locked in, the multifamily sector is booming. National rent growth turned positive in early 2024 and is projected to hit 2–3% in 2025, driven by supply constraints and a flood of Gen Z and millennial renters.

Why Multifamily REITs Are the Silver Lining

Despite the housing market's struggles, residential REITs—especially multifamily-focused ones—are undervalued relative to their fundamentals. Here's why now is the time to look at this sector:

1. Stabilizing Valuations with Upside Potential

Multifamily cap rates—the inverse of yields—have stabilized in the low-to-mid 5% range, down from pandemic-era highs but still offering better returns than 10-year Treasuries (which yield ~4.5%). Meanwhile, P/FFO multiples for apartment REITs are at 19.7x, well below the broader REIT index's 19.0x multiple and far below self-storage or healthcare REITs, which trade at 25.68x and 27.98x, respectively. .

2. Supply Constraints Create Rent Growth

The pipeline of new multifamily units is shrinking. Annual deliveries fell 42% in early 2025 compared to 2024, with fewer projects breaking ground due to high borrowing costs and regulatory hurdles. This means:
- Favorable vacancy rates: National vacancy is projected to drop below 8% by year-end, the lowest since 2019.
- Steady occupancy: Mid-tier and affordable housing (1–2 Star properties) are seeing 90%+ occupancy in supply-constrained markets like Minneapolis and Miami.

3. Demographics Are on Their Side

There are 150 million renters in the U.S., with Gen Z and millennials accounting for over half of them. These groups are entering peak renting years, and many will remain renters longer due to high mortgage rates. Even baby boomers are re-entering the rental market, “house-rich but cash-poor,” creating a long-term tailwind for multifamily demand.

Risks and Considerations

The multifamily sector isn't without its challenges. Oversupplied markets like Austin and Phoenix face price declines, while rising interest rates (if they spike again) could crimp affordability. Investors should focus on:
- Geographic diversification: Target markets with tight supply (e.g., Midwest cities) over Sun Belt areas with lingering inventory.
- Asset quality: Prime 5-Star properties in gateway cities (e.g., New York, San Francisco) offer steady cash flow, while value-add opportunities in mid-tier markets can deliver higher returns.
- Liquidity: Avoid REITs with heavy debt exposure or reliance on refinancing in a high-rate environment.

The Bottom Line: Look Past the Housing Slump

The lock-in effect isn't just slowing the housing recovery—it's creating a two-tier market: homeowners stuck in place, and renters driving demand for apartments. For investors, this means:
- Avoiding single-family homebuilders until mortgage rates drop further.
- Favoring multifamily REITs with exposure to supply-constrained markets and strong tenant demand.

The data is clear: while the housing market's downturn may linger, multifamily REITs offer a rare combination of stability and growth. Now is the time to look past the headlines and capitalize on this undervalued sector.