The “Magic” Interest Rate to Motivate Sellers

Many would-be buyers and sellers are sitting on the sidelines waiting for rates to drop before they decide to buy or sell their home. With roughly half of homeowners in the U.S. have 50% equity in their homes and more than 80% of them having a mortgage rate of 5% or less, it doesn’t make financial sense for these folks to sell right now. Why would a homeowner with a 3% (or less!) interest rate want to sell only to purchase another home with a 7% (current rate) interest rate? This is a classic example of “golden handcuffs”: Rock-bottom rates are effectively keeping homeowners stuck. Meanwhile, they’re sitting on a fat nest egg building equity…but that’s another post.

What will it take for these homeowners to move? According to Zillow, 5% is the magic number. If rates drop to 5% or below, then most sellers would be willing to sell. This is because, according to Zillow, “Homeowners with a mortgage rate above 5% are nearly twice as likely to say that they plan to sell their home than those paying a rate below 5%.”¹

If/when mortgage rates drop to 5% or lower, inventory will likely increase. This should give buyers more housing choices. However, that doesn’t necessarily translate to a more balanced housing market. Why? There are also a ton of buyers who are currently sitting on the sidelines waiting for rates to drop. On top of that, Millennial buyers, who comprise the biggest contingent of buyers ever, are and will be entering the housing market as first-time home buyers. As many of them head towards the median first-time homebuying age of 35/36, we will see increased demand especially for entry-level homes. This rising demand for could keep the housing market tipped towards sellers if inventory is insufficient to meet this demand.

My prediction? As interest rates decrease, particularly as they head under 6% and towards 5%, buying and selling activity will pick up significantly. If all those waiting on the sidelines suddenly jump back into the market, it could create a flurry of sales activity. Many experts predict that interest rates will drop in the second half of 2023 and into 2024, however don’t hold your breath. As I’ve watched the “experts” make their predictions over the past few years, interest rates is the biggest area where they seem to miss the mark.

1. Zillow Article: https://finance.yahoo.com/news/rate-lock-tipping-point-homeowners-120000456.html, accessed 8.23.2023.