Will Mortgage Rates Drop Enough to Bring Sellers Back? Here's What the Data Says

Will Mortgage Rates Drop Enough to Bring Sellers Back? Here's What the Data Says

The "lock-in effect" has kept homeowners from selling their homes due to lower mortgage rates. This has resulted in low inventory and stable home prices. However, with mortgage rates recently decreasing, the housing market shows signs of rebounding. Will this break the lock-in effect and impact housing prices?
While the full effect of declining mortgage rates is not yet realized, there are indications of change. Pending home sales are decreasing less year-over-year, possibly due to sellers lowering their prices. Inventory has been increasing since April, influenced by mortgage rates and new construction.
There are early signs of sellers returning to the market, with an 11% increase in new sellers compared to last year. New contracts are also on the rise. However, some experts predict that if mortgage rates continue to fall, demand from movers and new homeowners will increase, possibly causing a significant price rise. On the other hand, economists expect rates to remain above 6% until 2024, which may deter sellers.
Research suggests that a 5% mortgage rate may be the breaking point for sellers to consider moving. However, given that only a small percentage of homeowners have rates above 6%, the impact of decreased rates on the market may be minimal. Additionally, most homebuyers won't act until rates fall below 5.5%, indicating that prices may remain stable in the coming years.
History shows that stabilizing mortgage rates can drive increased home sales, without needing to reach pandemic-era lows. Once consumers adjust to a new normal, transaction volume may increase.
Mortgage rates and existing-home sales (1979-1984) – Freddie Mac
The current housing market resembles conditions in the early 1980s, when existing-home sales declined due to increasing mortgage rates. However, there are differences, such as higher home prices today. In the 1980s, each dollar spent on real estate stretched further, and assumable mortgages influenced sales. The lock-in effect was less significant back then.
To make selling financially beneficial, homeowners would need to gain a substantial amount from a move. For the average homeowner, a $55,000 net gain is necessary based on current mortgage rates. Therefore, the lock-in effect in the 1980s was not as impactful compared to the present.
Will the decrease in mortgage rates be enough to bring sellers back to the housing market? Only time will tell.
Factors Affecting Home Sales: Supply and Demand Imbalance Persists
The impact on housing inventory goes beyond the lock-in effect, making the situation more complex. Contrary to popular belief, high mortgage rates do not greatly influence the decisions of home sellers as shown by a recent survey by Fannie Mae. Only 21% of mortgage borrowers who intended to stay put cited their current low mortgage rates as the primary reason. This represents a mere 6% of mortgage borrowers who are delaying selling due to feeling trapped. Furthermore, many homeowners are also choosing to remain in their homes because they genuinely enjoy their property or its location. High home prices and factors such as proximity to work or family also contribute to the lack of available housing inventory.
Different studies reveal diverging results. For instance, a Realtor.com survey indicates that a majority of homeowners feel trapped, particularly younger buyers. Regardless of the underlying reasons for not selling, there continues to be a shortage of housing supply in relation to demand. This discrepancy is one of the reasons why there is an improvement in homebuilder sentiment and an increase in new construction starts.
Although there is a projected 4% increase in single-family construction starts for 2024, it is still a fraction of what is required to meet demand. Chief economist Lawrence Yun of the National Association of Realtors (NAR) highlights that the housing market could easily absorb a further 30% increase in new construction starts.
The Takeaway: Uncertainty Surrounds the Future of Home Sales
Looking at past trends, we may witness a gradual rise in existing-home sales alongside declining mortgage rates. However, there are numerous variables at play that make it challenging to determine if sellers will reenter the market in 2024 with certainty. If mortgage rates decrease significantly early in the year, there is the potential for a quick rebound in demand, driving prices even higher. Conversely, a deep recession and rise in unemployment could result in distressed sellers flooding the market with new supply, leading to more price reductions. It is widely expected that conditions will remain relatively stable in 2024 unless mortgage rates decrease sufficiently by 2025.

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