Recent surveys reveal a significant pool of potential homebuyers waiting for the right moment to enter the market. Approximately 42% of prospective buyers indicate they're ready to purchase a home when mortgage rates reach the 5% range. This figure jumps to around 70% when including those willing to buy at rates between 4% and 5%.

This pent-up demand has been building over the past three years, with an estimated 4.2 to 4.7 million potential homebuyers who have been unable to purchase due to various factors. These individuals may have attempted to buy, been priced out of the market, or faced affordability challenges. As mortgage rates approach the coveted 5% mark, we may see a significant surge in homebuying activity.

The Lock-In Effect and Its Impact

The current housing market is experiencing a phenomenon known as the "lock-in effect." Approximately 89% of existing homeowners have mortgage rates at or below 5%, thanks to the historically low rates during the COVID-19 pandemic. This situation has created a reluctance among homeowners to sell and move, as doing so would mean giving up their favorable mortgage terms.

The lock-in effect has contributed to the constrained housing inventory we see today. Many homeowners are choosing to stay put rather than face higher interest rates on a new mortgage. However, as rates begin to approach the 5% range, we may see this effect start to loosen. Homeowners who have been considering a move but were hesitant due to higher rates may find the opportunity they've been waiting for.

The Ripple Effect of Lower Rates

As mortgage rates decline, we can expect to see a wave of activity in the housing market. This includes not only an increase in home purchases but also a surge in refinancing activity. Homeowners with substantial equity may choose to refinance to access cash or simply to lock in a lower rate if it's advantageous.

The potential increase in home sales could create a domino effect in the market. As current homeowners decide to sell and move, they often become buyers themselves, creating a chain of transactions. This increased activity could help to balance the market and potentially lead to a more normalized inventory situation.

Preparing for the Market Shift

Real estate professionals and mortgage lenders should be preparing now for the potential surge in market activity. This includes staying in close contact with their client databases and understanding each client's target interest rate for buying or refinancing. By being proactive, these professionals can help their clients take advantage of favorable rate conditions as soon as they arise.

It's important to note that while a drop in rates may initially spark a frenzy of activity, this intense period may be relatively short-lived. As affordability improves due to lower rates, home prices may begin to rise in response to increased demand. This could eventually lead to a more balanced market situation.

Bottom Line

The housing market appears to be on the cusp of a significant shift as mortgage rates approach the 5% range. Both pent-up demand from prospective buyers and the potential unlocking of the lock-in effect could lead to increased market activity. While the duration and intensity of this period remain uncertain, it presents opportunities for both buyers and sellers. Those involved in the real estate and mortgage industries should be prepared to navigate this dynamic environment and help their clients make informed decisions.