For several years, a persistent and historic lack of supply has restrained the housing market, but a recent uptick in inventory is poised to boost sales activity as the spring home-buying season peaks. Our Existing-Home Sales Outlook Report ‘nowcasts’ existing-home sales based on the historical relationship between sales, demographic trends, house-buying power, and the prevailing financial and economic conditions. Based on our nowcast, we expect existing-home sales to rise, but remain modestly lower than the actual annual pace of sales one year ago. With mortgage rates hovering near 7 percent, the bulk of existing homeowners face a financial disincentive to sell their home – what’s known as the rate lock-in effect. The lock-in effect has moderated modestly since mortgage rates peaked in October 2023 but will continue to limit market potential until rates either decline sufficiently to free a substantial number of homeowners or remain elevated long enough that a significant portion of borrowers lock into these higher rates.

The good news is that, despite the lock-in effect, more homeowners are choosing to list their homes for sale than a year ago. According to data from Zillow, new listings in April increased 16 percent compared to the same month last year. While this figure is still 22 percent below the average number of new listings recorded in April during the years 2018, 2019, 2021, and 2022 – excluding 2020 due to peak pandemic conditions – the progress is a welcome development. More inventory typically prompts more sales, but what is motivating sellers to sell? While the majority of homeowners remain rate locked-in, sellers have un-anchored their expectations from the pandemic-low mortgage rates. Additionally, high levels of home equity could mitigate the impact of the rate lock-in effect. Homeowners have gained quite a bit of equity in their homes alongside growing house prices since the beginning of the pandemic.  For some of those equity-rich homeowners, moving and taking on a higher interest rate isn’t a huge deal, especially if they’re moving to a more affordable home or market. Finally, an existing homeowner may choose to sell for lifestyle reasons, even if it means losing their low mortgage rate. Higher inventory levels offer more choices for buyers and potential sellers alike, boosting market activity as participants find more options suited to their needs.

Source: First American