Existing housing supply builds as homeowners with sub 6% mortgage rates return

Mortgage rates are set to drop at a faster rate than initially anticipated, which could help build some much-needed housing supply. However, some homeowners are already selling, according to a recent report.

The share of mortgages with a rate below 6% has fallen to 88.5% from a record high of 92.8% in mid-2022, indicating that some homeowners have given up their lower rate to move, according to the Redfin report.

Some homeowners have had to move because of changing life circumstances like divorces, new jobs, or deaths in the family. Also helping build supply is that rates have dropped enough in recent weeks to convince some homeowners, in particular those that have also benefited from growing home equity due to rising home prices.

"Sellers have started coming out of the woodwork because that's typical for January and because mortgage rates have dropped," David Palmer, a Redfin Premier real estate agent in Seattle said. "They're also coming to terms with the fact that rates aren't going back down to 3% any time soon, which makes it easier to pull the trigger on selling.

"But a lot of sellers are worried about finding their next house because even though listings are rising, there's still a housing shortage," Palmer continued. "That's part of the reason so many sellers remain on the sidelines."

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More supply expected as rates head further south

Fannie Mae is forecasting that mortgage rates will drop below 6% by the end of 2024 after anticipating that they would fall much slower in an earlier forecast. Lower rates are likely to help increasingly entice homeowners locked into lower rates back into the housing market, the mortgage giant said.

While the faster-than-expected drop in rates won't push inventory to pre-pandemic levels, Fannie Mae expects home sales to increase to 4.5 million units by the fourth quarter of 2024, compared to 3.8 million in the fourth quarter of 2023. This, coupled with an increasing supply of new builds, should help to slow runaway home prices – another barrier of entry for first-time homebuyers in particular.

"We expect mortgage rates to dip below 6 percent by year-end 2024 and for homebuilders to continue to add new supply, both of which should aid affordability," Fannie Mae Senior Vice President and Chief Economist Doug Duncan said in a statement. "However, even at less than 6 percent, we think rates will still have a significant way to go in order to meaningfully reduce the 'lock-in effect' experienced by homeowners who refinanced or bought during the pandemic."

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Home prices cool in December

U.S. home prices climbed 0.4% month over month in December, the smallest increase since June, according to the Redfin Home Price Index (RHPI).

Home price growth slowed for two reasons, according to Redfin. High mortgage rates likely led to lower appetite, and a more robust supply of listings gave homebuyers more options.

"Homebuyers can take solace in the fact that prices are unlikely to balloon again like they did during the pandemic homebuying frenzy, but they probably won't fall any time soon, either," Redfin Senior Economist Sheharyar Bokhar said. "That's because supply isn't growing enough to bring prices down, and mortgage rates are no longer falling enough to drive prices up significantly."

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