If you’re in the market for a new home, you’ve probably been keeping an eye on mortgage rates. The recent downward trend in mortgage rates is good news for prospective homebuyers because it makes homeownership more affordable. But there’s another significant way in which falling mortgage rates benefit you – they may inspire more homeowners to put their houses up for sale.
The Mortgage Rate Lock-In Effect
Over the past year, one significant factor that has limited housing options for potential buyers is the scarcity of available homes on the market. Many homeowners chose to delay their plans to sell when mortgage rates went up. Freddie Mac explains this phenomenon as the “rate lock-in effect,” stating:
“The lack of housing supply was partly driven by the rate lock-in effect. . . . With higher rates, the incentive for existing homeowners to list their property and move to a new house has greatly diminished, leaving them rate locked.”
Essentially, homeowners decided to stay in their current homes and maintain their lower mortgage rates rather than moving and taking on a higher rate for their next home.
Early Signs of Homeowners Ready to Move Again
Fortunately, there are early signs that indicate these homeowners are now ready to make a move. According to the latest data from Realtor.com, there was a notable increase in new listings in December 2023 compared to December 2022. Typically, housing market activity slows down in the later months of the year as some sellers choose to delay their moves until the new year. However, this marks the first time since 2020 that we’ve seen an uptick in new listings during this time of year. This could be a clear signal that the rate lock-in effect is easing in response to lower rates.
What Does This Mean for Prospective Buyers?
While this doesn’t mean there will suddenly be an abundance of options for your home search, it does indicate that more sellers may be considering listing their homes. The Joint Center for Housing Studies (JCHS) suggests:
“A reduction in interest rates could alleviate the lock-in effect and help lift homeowner mobility. Indeed, interest rates have recently declined, falling by a full percentage point from October to November 2023 . . . Further decreases would reduce the barrier to moving and give homeowners looking to sell a newfound sense of urgency . . .”
In practical terms, this means you may start to see more homes coming onto the market, providing you with fresh options to choose from. It could potentially alleviate some of the competition for the limited housing inventory that has been driving up prices.
Bottom Line
As mortgage rates continue to come down, more homeowners may feel encouraged to re-enter the market. This opens up opportunities for prospective buyers to find the home they’ve been searching for. To navigate this evolving market, it’s wise to connect with a local real estate expert who can help you stay updated on the latest listings in your area and guide you through the buying process. Falling mortgage rates are a positive sign for both buyers and sellers, as they can stimulate increased activity in the housing market and provide more options for all parties involved.