Zillow’s Quarterly Survey Finds Homeowners Are Twice as Likely to Sell With Interest Rates Above 5%

It’s common knowledge that there’s been a shortage of homes for sale for some time. Part of it is due to chronic underbuilding in the days since the housing crash, but lately, higher mortgage rates, which now hover just below 7%, according to Freddie Mac, are also an issue.

It all boils down to the record-low interest rates that most homeowners are holding on to. According to Zillow, a whopping 80% of homeowners currently have rates under 5%, and 1 in 3 even have rates below 3%. 

For those homeowners, selling a home in today’s market means trading up for a much higher interest rate—and likely giving up a big chunk of their sale profits in the process. In fact, the premise is so unappealing that a recent Zillow survey shows that homeowners with rates under 5% are half as likely to sell their home in the next few years. Of those with rates over 5%, though, nearly 40% say they have plans to sell soon. 

“These homeowners face no or relatively little financial disincentive to trading their current mortgage for a new one,” wrote Zillow’s Treva Tam. “On the flip side, homeowners already paying a lower interest rate may be reluctant.”

What It Means for the Market

The Zillow findings aren’t too surprising, but they don’t bode well for the market’s inventory problem—nor for home prices, both now and later (depending on what side of the closing table you’re on). 

According to the survey, a mere 23% of all homeowners are considering selling their home in the next three years—and that includes people who already have their homes listed right now. 

Though new home construction has picked up steam in recent months, the lack of existing inventory hitting the market—both now and presumably down the line—will likely keep home prices elevated for some time.

Of course, if mortgage rates ever come down, then the listings will follow. Once rates dip below that 5% mark—as Zillow’s data suggests—more homeowners will be more willing to put their house on the market. 

Rates that low probably aren’t in the cards anytime soon, however. Though the Mortgage Bankers Association’s current forecast does call for a 4.9% average 30-year mortgage rate by the end of 2024, they’re an outlier—and both Fannie Mae and the National Association of Realtors think rates will be much higher. 

Even Zillow doesn’t expect it any time soon. As Orphe Divounguy, senior economist at Zillow Home Loans, put it, “We expect mortgage rates may notch down slightly as inflation comes under control, but they are unlikely to return to 5% in the near future.”

Adjusting to Higher Rates

Not all consumers have the luxury of waiting around for rates to drop. Job changes, new babies, and major life events will still push some consumers into selling their properties or buying new ones—even with today’s higher rates. 

As that happens, it could bring things more into balance. Fewer homeowners will have those bargain-basement rates, and existing inventory will, therefore, be more likely to hit the market. This could potentially keep home prices (which jumped steadily over the last four months) from rising or even begin to fall. 

The real key factor will be how inventory shakes out. And with the market currently 4.3 million homes short of demand, according to Zillow, there’s a lot of progress to be made.

“Over time, homeowners will likely accept higher rates as the new normal,” Divounguy says. “But until then, the market could remain challenging for home shoppers, who will see fewer options and higher prices.”

Final Thoughts

What is important to note is that the answers to this survey indicate that the number of homeowners willing to list their property on the market is growing, even with the context that rates will potentially stay in similar territory. Could that mean that the “lock-in” effect could come to an end sooner than later? The reality is that people will adjust to the economic environment, and if that means giving up a lower rate for the sake of moving, they might just do that. But does that mean a growing share of listings, coupled with demand still being suppressed by mortgage rates, equals another correction?

It’s way too early to tell, but it’s possible.

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.