It’s well-known there’s a shortage of available homes for sale, creating a unique set of challenges in the real estate market. While factors such as underbuilding since the housing crash have contributed, the issue has been further compounded by the recent uptick in mortgage rates. 

At the core of this complex situation lies the prevalence of record-low interest rates that a significant majority of homeowners currently enjoy. Remarkably, an astonishing 80% of homeowners currently maintain interest rates below 5%, and a striking 1 in 3 homeowners have rates that dip below the 3% mark, according to data from Zillow.

For these homeowners, the prospect of selling their homes in the present market presents a dilemma. Trading up to a new property could mean accepting a significantly higher interest rate, thereby potentially diminishing the gains from their home sale. This predicament has been underlined by a recent Zillow survey, revealing that homeowners with rates below 5% are only half as likely to consider selling their homes in the coming years. Conversely, nearly 40% of homeowners with rates exceeding 5% express intentions of selling in the near future.

The implications of these findings on the real estate market are substantial, shaping both the current and future dynamics of home prices and inventory. The survey underscores that a mere 23% of homeowners are contemplating listing their properties within the next three years, encompassing even those who are presently listed. While the pace of new home construction has gained momentum in recent months, the shortage of existing inventory entering the market is expected to exert upward pressure on home prices for an extended period.

The potential alleviation of this situation hinges on the movement of mortgage rates. If rates were to descend below the 5% threshold, as hinted by Zillow’s data, a surge in homeowners willing to list their properties could follow suit. However, experts suggest that such low rates may not materialize in the near future. Although the Mortgage Bankers Association foresees an average 30-year mortgage rate of 4.9% by the end of 2024, other forecasts from entities like Fannie Mae and the National Association of Realtors paint a more pessimistic picture of higher rates.

Zillow’s own analysis aligns with this perspective. Orphe Divounguy, a senior economist at Zillow Home Loans, points out that while some moderation in mortgage rates might occur as inflation is reined in, a return to the 5% threshold is unlikely in the foreseeable future.

Nonetheless, not all homeowners have the luxury of awaiting rate fluctuations. Life events such as job changes, growing families, and other significant milestones could compel individuals to either sell their properties or make new purchases, even amidst elevated rates. This could potentially restore equilibrium to the market by reducing the prevalence of ultra-low interest rates and prompting more existing inventory to become available. Consequently, this may help to stabilize or even reduce the recent upward trajectory of home prices.

The ultimate factor determining the market’s trajectory will be the behavior of inventory. With the current market reportedly undersupplied by around 4.3 million homes, as indicated by Zillow’s data, substantial progress remains to be made.

In this evolving landscape, it is noteworthy that a growing number of homeowners are displaying a willingness to list their properties, despite the prospect of sustained rates. This suggests that the phenomenon of homeowners “locking in” low rates could potentially dissipate sooner rather than later. As individuals adapt to the economic environment, some may choose to prioritize their relocation goals over the preservation of lower interest rates. This shifting mindset, coupled with the ongoing suppression of demand due to mortgage rates, raises questions about the possibility of another market correction. While it remains too early to definitively ascertain, such a scenario cannot be ruled out.