The Impact of Interest Rates on Home Sales: Insights from Zillow's Quarterly Survey

In the ever-evolving world of real estate, one constant factor remains - the influence of interest rates on home sales. Recent findings from Zillow's quarterly survey shed light on how homeowners' mortgage rates are shaping their decisions to sell or hold onto their properties. In this article, we'll explore the key takeaways from this survey and what they mean for the real estate market.

The Interest Rate Landscape

It's no secret that the housing market has been grappling with a shortage of homes for sale for some time now. While this issue can be attributed partly to underbuilding since the housing crash, higher mortgage rates have also emerged as a significant concern. Currently, mortgage rates are hovering just below 7%, as reported by Freddie Mac.

However, the crux of the matter lies in the exceptionally low interest rates that most homeowners are currently enjoying. Zillow's data reveals that a staggering 80% of homeowners presently have mortgage rates under 5%, with one in three even boasting rates below 3%. For these homeowners, the prospect of selling their homes in the current market would entail trading up to a considerably higher interest rate—a move that might eat into a substantial portion of their sale profits. Unsurprisingly, a recent Zillow survey indicates that homeowners with rates under 5% are only half as likely to sell their homes in the coming years. Conversely, among those with rates exceeding 5%, nearly 40% express intentions to sell soon.

Market Implications

The Zillow survey findings, while not entirely unexpected, pose challenges for the market, particularly in terms of inventory and home prices. According to the survey, a mere 23% of all homeowners are contemplating selling their homes in the next three years, encompassing those who have already listed their homes. This shortage of existing inventory entering the market, both in the present and presumably in the foreseeable future, is likely to keep home prices elevated for an extended period.

The trigger for a surge in listings, as Zillow's data suggests, could be mortgage rates dipping below the 5% mark. However, such a scenario is unlikely in the near future. The Mortgage Bankers Association forecasts a 4.9% average 30-year mortgage rate by the end of 2024, while other entities like Fannie Mae and the National Association of Realtors predict even higher rates. Zillow itself does not anticipate a return to 5% rates anytime soon.

Adjusting to Higher Rates

While some homeowners can afford to wait for more favorable rates, others face circumstances that necessitate immediate action, such as job changes, expanding families, or other significant life events. Consequently, these individuals may enter the market, contributing to a potential equilibrium. As more homeowners transition from their existing lower-rate mortgages, there's a greater likelihood of increased inventory hitting the market. This influx could help stabilize or even reduce home prices, which have experienced a steady ascent over the past several months.

However, the critical determinant lies in how inventory dynamics play out. Currently, the market faces a significant shortfall of 4.3 million homes in relation to demand, according to Zillow. Until homeowners adapt to the idea of higher rates as the new norm, homebuyers may continue to grapple with limited options and elevated prices.

Adapting to Shifting Mortgage Rates

The Zillow survey's insights suggest a growing willingness among homeowners to list their properties, even in anticipation of sustained interest rates. This raises the question of whether the so-called "lock-in" effect, where homeowners clung to lower rates, might eventually wane. As economic conditions evolve, people tend to adjust, and for the sake of relocating, they might be willing to forgo their lower interest rates. However, the interplay between a burgeoning share of listings and demand constrained by mortgage rates is a complex equation.

In conclusion, while it's too early to predict definitively, the real estate market is poised for potential changes as homeowners grapple with the evolving landscape of interest rates. As the market navigates through these uncertainties, it remains crucial for both buyers and sellers to stay informed and adapt to the dynamic real estate environment.