High rates are making builders hesitate, deepening a supply shortage that mortgage professionals already know too well
The mortgage lock-in effect – the tendency of homeowners with pandemic-era sub-5% loans to stay put rather than sell into today’s rate environment – has long suppressed existing home listings.
In 2026, it is reaching further into the pipeline, cooling new construction at the moment the market needs builders most.
Alan Atchley (pictured top), a Florida real estate broker, certified general contractor, and owner of Better Homes and Gardens Real Estate Atchley Properties, tracks this pressure from both sides of the market.
With more than 30 years spanning construction, development, and residential brokerage, he sees the same rate environment shaping decisions at every stage of the pipeline.
“With the overwhelming majority of borrowers holding rates well below today’s market, the lock-in effect isn’t just freezing existing listings, it’s making builders think twice as well,” Atchley told Mortgage Professional America.
“As both a contractor and a broker, I see developers hesitating to start new projects when rates sit above 7%, because the numbers on new construction only work if buyers can actually absorb today’s financing costs. Building less now only tightens the very supply that could eventually ease pressure on sales.”
Lock-in effect tightens grip on new construction supply
Goldman Sachs Research, in its latest outlook for US housing through 2027, projects single-family starts will fall from 0.90 million in 2026 to 0.87 million in 2027, with residential fixed investment contracting in the first half of next year.
That trajectory extends a 9% single-family start plunge to 930,000 in April, the steepest monthly fall since August.
The US housing market entered 2026 short more than 4 million homes, per Realtor.com’s Housing Supply Gap Report, with that cumulative deficit having widened from the prior year.
That hesitation is now reflected in the industry’s own confidence barometer. The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) fell three points to 29 in October, its weakest reading since June 2012.
Prospective buyer traffic sliding to 18, the lowest outside the pandemic’s onset in April 2020.
Some 43% of builders cut prices in October, the highest share recorded across the entire 2020–2026 period.
NAHB Chief Economist Robert Dietz, based in Washington, DC, was direct about what is driving the pullback.
“Housing remains squeezed by supply-side constraints and significant affordability challenges,” Dietz said.
“Demand persists, but higher mortgage rates, elevated construction costs and weaker consumer confidence are keeping more buyers on the sidelines.”
For Atchley, the deeper concern lies in the lag built into the development cycle itself.
“New construction has a timing problem that often gets overlooked,” he said.
“Builders have to make investment decisions today based on what buyers might be able to afford when a home is finished. High borrowing costs affect both sides of that equation. They make projects more expensive to finance while limiting purchasing power. If developers respond by reducing construction, the impact on housing supply could continue long after mortgage rates improve.”
Selma Hepp, Chief Economist at Cotality, says growing inventory, increased price reductions, and greater seller flexibility could create opportunities for buyers willing to enter the market during the slower winter months. https://t.co/IxCy2Z0RBm
— Mortgage Professional America Magazine (@MPAMagazineUS) November 3, 2026
Affordability goes beyond the rate
For mortgage brokers working with clients on the sidelines, the interest rate is only one piece of the monthly cost equation, a point Atchley raises directly with buyers.
“Even when mortgage rates come down slightly, buyers aren’t just looking at the interest rate,” he said.
“They’re looking at the full monthly cost of owning a home. Property taxes, insurance, and potential repairs can quickly erase the savings from a small rate reduction. That’s why affordability won’t suddenly improve just because rates ease. Buyers need to look at the entire financial picture, not just what they can borrow.”
In Florida, where slower market activity has tested buyer and seller psychology, the fundamentals of individual listings are increasingly separating properties that move from those that sit.
“Slower sales don’t automatically mean home prices are about to fall,” Atchley said.
“Florida still has areas where limited inventory supports prices, even when buyers are taking longer to make decisions. What matters increasingly is the condition of the property and whether the asking price reflects its actual value. A home that needs significant repairs is a very different proposition from a move-in-ready property, particularly when financing remains expensive.”
That reluctance to stretch on price or condition reflects the same lock-in dynamic on the demand side.
A February survey by Best Interest Financial and Clever Real Estate found that 35% of mortgage holders with sub-6% rates would not surrender their loan for any reason, even when their home no longer fit their family’s needs.
Stay updated with the freshest mortgage news. Get exclusive interviews, breaking news, and industry events in your inbox, and always be the first to know by subscribing to our FREE daily newsletter.
