The mortgage lock-in effect continues to present a challenge in the residential market, warranting a recent story in the Wall Street Journal as well as a specific mention at the December Federal Reserve meeting by Chair Jerome Powell. Homeowners with low-interest-rate loans are staying put rather than listing their properties, because the high cost of funds gives them little financial incentive to do so. (More than half of American homeowners had an interest rate below 4% as of the second quarter of 2025; about 80% have rates of 6% or less.) Interest rates may decrease further in 2026, but they are very unlikely to drop below the low 5 percent range let alone into the 4 percent range. What’s needed, in order to break the lock-in, is for prices and mortgage payments to come down to levels perceived as affordable.
As anticipated for this time of year, not a lot of inventory has come to market the past month. January will serve as an early market indicator, especially once we start seeing physical signs popping up around neighborhoods and observe how fast they move through the market. Meanwhile, signs of distress and short sales are on the uptick, particularly among properties that were acquired in 2021–2022 that have come down in value to the point they are underwater. The trend is no longer confined to outlying areas with large inventories of new builds, however, and has extended into more central areas of the Valley. The affected product types are largely starter homes and move-ups, and specifically condominiums and attached housing. One of the key drivers is how expensive it has become for HOAs to manage and maintain their properties and shared amenities. Higher community association rates are having a notable impact on property sales.
From November to December 2025, the supply-demand index increased from 79.2 to 84.1. The supply index decreased from 104.9 to 101.0, while the demand index increased from 83.1 to 85.0. The Federal Reserve dropped the Fed Funds Rate by 0.25 point once again on December 10 and announced that it would begin purchasing short-term bonds. These moves don’t directly affect mortgage rates, but they will help reduce short-term rates on credit cards, auto loans, and HELOCs. Notable legislative changes due to take effect in early 2026 include the Arizona Middle Housing Law and the FinCEN Residential Real Estate Rule.
You can read all the details in the R.O.I. Properties “Real Estate – Residential” newsletter, with additional statistics, market trends, and information.
Originally shared via roiproperties.com. Click here to read the full newsletter.