Millions of households that purchased homes or refinanced mortgages over the last four years, when interest rates were at historic lows, could challenge a housing market recovery if long-term interest rates were to rise quickly in the coming years, according to research from the Institute for Housing Studies at DePaul University.

Increases in mortgage rates are expected due to continued ​pullback in the Federal Reserve’s quantitative easing policy, the study’s authors note.

"This research shows that locked-in households will be reluctant to sell their homes and finance other purchases at higher interest rates," says Patric H. Hendershott, an author of the study and senior research fellow. “This threatens an already delicate housing and economic recovery.”

The findings are summarized in a research brief, “The Impact of Lock-In Effects on Housing Turnover and Implications for a Housing Recovery,” released by the institute. The research finds the decline in housing sales will be greatest in the strongest housing markets, which suffered the least price decline during the recent housing bubble and have led the recent recovery in house prices. Households in these areas were most able to refinance their mortgages to take advantage of historically low interest rates.

The research shows that as the numbers of interest-rate locked-in households grow, there would remain a large number of homeowners who are locked-in to their homes due to negative equity. This combination of interest-rate and equity locked-in households represents a challenge to the housing market and economic recovery in coming years.

The researchers developed a scenario meant to simulate the unwinding of the Federal Reserve’s quantitative easing policy in the coming years. In this scenario, there was a single 10 percent increase in house prices followed by three annual percentage point increases in mortgage rates. Results of this simulation found that while rising house prices unlocked some underwater households, it was not enough to offset the increase in interest-rate locked-in households.

Based at the Real Estate Center at DePaul, the Institute for Housing Studies is a research hub that provides analyses and data to inform housing policy and practice.

The institute's researchers analyzed the impact of locked-in households on housing turnover, or property sales activity, in Cook County, Illinois, home to the city of Chicago and one of the country’s largest and most diverse urban housing markets. The research is available to download at

In addition to Hendershott, other authors include Jin Man Lee, the institute’s research director, and Real Estate Professor James D. Shilling, the Michael J. Horne Chair in Real Estate Studies at DePaul’s Driehaus College of Business.

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