Are You Giving Up Hope for Lower Mortgage Rates? You May Not Be the Only One

If the answer to more affordable real estate is more homes for sale, there are some promising signs on the horizon. 

While the U.S. market still has far fewer homes than it did before the pandemic, the shortage could be starting to shrink as would-be sellers who have been holding out for better mortgage rates give up on the prospect of any notable drop, according to Zillow. One measure tracked by the real estate website shows the October shortfall in new listings was smaller than it’s been in a year and a half.

Stubbornly high mortgage rates of more than 7% may have “convinced homeowners on the fence to go ahead with a sale,” Zillow Chief Economist Skylar Olsen said in an online posting about the new data. “The longstanding deficit in new listings is generally shrinking as sellers accept that higher rates are sticking around.”

Any new willingness to sell is a good sign for a housing market hampered by what many call the “rate lock” or “golden handcuffs” problem. Because so many homeowners either bought their house or refinanced during the pandemic, the vast majority have 30-year mortgages with interest rates of 3%-4% — about half of what they are now.

Those rates have essentially spoiled them, experts say. To avoid doubling their borrowing costs on their next house, they’ve stayed put, even if they were ready to move. And that has left the market even smaller than it got during the pandemic buying boom.

If homeowners are coming to terms with higher mortgage rates, it could have reverberating benefits for buyers. Borrowing costs are keeping many would-be buyers away, but because there are so few homes available, the competition is still pretty fierce, economists say.

That means property values that were inflated at record speed during the pandemic aren’t coming back down to earth like they might have otherwise. Between prices and mortgage rates, the typical household income can’t afford a median-priced home for the first time since the 1980s. 

Zillow’s economists are encouraged because the volume of new listings isn’t dropping off as sharply as it normally would this time of year, when most people aren’t house hunting. Nationwide, there were 311,854 new listings in October, only 1.2% fewer than the number in October 2022, according to the new Zillow data. For comparison, the shortfall hasn't been smaller since May 2022 and was 9.2% in September and as much as 28% in June.

“New listings may have found the bottom this fall,” Orphe Divounguy, a senior economist on Olsen’s team, wrote in an email. “We are certainly not out of the woods — inventory remains well below pre-pandemic levels — but this is a step in the right direction.” 

Compared to pre-pandemic norms, October’s new listings were still 19% shy, but that’s improved from a trough of 35% in April, Zillow pointed out.

“If new listings began to rise faster than sales, then the resulting increase in inventory would put downward pressure on home values,” Divounguy said.

Mortgage rates that more than doubled last year shot up again this fall, sending the average for a 30-year loan close to 8% last month, according to data from the mortgage giant Freddie Mac. The average has since subsided to 7.5%, but the Mortgage Bankers Association forecasts it won’t fall below 6% before 2025.