The Changing Mindset of Home Sellers and the Lack of Housing Inventory

The last few years, the real estate market has undergone a dramatic shift, resulting in a consistent lack of housing inventory. Mortgage rates, which have historically been a key factor in the decision-making process for both buyers and sellers, have risen sharply. In particular, interest rates on home loans have doubled from the ultra-low levels many enjoyed during the pandemic era. Yet, despite this surge in borrowing costs, home prices are still climbing, and inventory remains incredibly low. Why? The effects of low interest rates on existing homeowners are far-reaching, especially for home sellers.

The Dilemma for Home Sellers

For many homeowners, the decision to sell their property and buy a new one isn’t just about upgrading to a larger home or moving to a different location—it’s also about the financial implications of making that move. As mortgage rates have increased significantly over the past year, the decision to buy a new home has become much more expensive.

Here’s the catch: Many homeowners who locked in ultra-low interest rates in recent years (think 2-3% mortgages) now face the prospect of having to refinance or purchase a new home at rates exceeding 6.5%—a hefty jump. For many, that could significantly increase their monthly mortgage payments, which is a major deterrent and a primary reason for the lack of housing inventory.

The Numbers Tell the Story:

• A $900,000 mortgage at a 3% interest rate would result in a monthly payment of around $3,796 (excluding taxes and insurance).
• The same mortgage at a 6.5% rate would cost around $5,689 per month.

That’s a difference of almost $1,893 per month, or over $22,000 per year—money that could go toward other expenses, savings, or investment opportunities. With this large disparity, it’s no surprise that many homeowners hesitate to sell.

Why Sellers Are Choosing to Stay Put

So, what are home sellers doing instead of buying a new home? In many cases, they’re staying in their current properties longer than initially planned. This is partly driven by the fear of paying much higher monthly mortgage payments if they were to upgrade.

1. Renovating Instead of Moving:

Many homeowners are choosing to renovate and improve their existing homes rather than sell and move. This allows them to enjoy an upgraded living space without taking on the higher costs of purchasing a new home. Renovations can be particularly appealing because they offer homeowners the opportunity to increase the value of their property, making it more enjoyable in the short term while possibly setting themselves up for a larger sale price later down the road. FYI, here are the things we suggest doing if you’re looking to add value to your current home.

1. Renting Out Their Current Home:

Another trend is homeowners deciding to convert their current home into a rental property. The logic here is simple: if they’re not ready to sell but also don’t want to commit to a new mortgage at higher rates, renting out their home can provide steady income. This option also gives them time to monitor the market, and if interest rates begin to decline, they may choose to buy again in the future.

1. Downsizing Delayed:

For those who were originally looking to downsize into a smaller home, rising interest rates have delayed those plans. Homeowners who might have downsized to free up cash or reduce maintenance costs are finding that it makes more sense to stay put in their current homes for the time being.

The Housing Inventory Squeeze and Its Impact on Prices

One of the most notable effects of the decision to stay in place is the strain it puts on housing inventory. When fewer people are selling their homes, there are fewer properties available for buyers. This creates a classic supply-and-demand imbalance, and as a result, home prices continue to rise. In King county home prices are up 6.5% YOY even as mortgage rates have jumped. The lack of homes for sale has kept home prices high. Inventory is up in 2024 over 2023 but is still at historically low levels compared to the last decade.

Here are a few ways this inventory squeeze is impacting the market:

1. Increased Competition for Homes:

Fewer homes on the market means that buyers are competing for the limited inventory that exists. This competition often results in bidding wars, which can drive prices even higher. In some cases, buyers may be willing to stretch their budgets further to secure a property despite the higher mortgage payments.

1. Elevated Home Prices Despite Higher Rates:

Even as mortgage rates have increased, the low inventory levels are keeping home prices high. Sellers know that demand is still strong, and while buyers may be priced out of certain markets, many are still willing to pay top dollar for homes. In some of the country’s most competitive housing markets, prices have continued to increase, albeit at a slower pace than during the peak pandemic years.

1. Home Prices Aren’t Necessarily Following Mortgage Rates:

While it’s common for mortgage rates and home prices to move in tandem (with rising rates cooling off home prices), the current market is defying that trend. This disconnect is largely due to the inventory shortage. Because fewer homeowners are selling, there simply aren’t enough homes to meet demand, so prices remain high, even if buyers are paying more for their loans.

What Does This Mean for the Market Moving Forward?

The current dynamic—where home sellers are staying in place due to the high cost of purchasing a new home—is creating a scenario of “stuck sellers” and persistent low inventory. Unless interest rates start to decrease or other factors (like inflation or wages) improve, it’s likely that many homeowners will continue to delay their decision to sell. For first-time homebuyers, this could mean more competition and higher prices as they try to enter the market. For sellers, this may also mean that those who do choose to list their homes will see increased demand, but at the cost of higher rates and more expensive financing for buyers.

As we move into 2024 and beyond, much will depend on whether interest rates stabilize or continue to climb. If rates remain high, we could see the trend of “stay put” homeowners continue, which will likely keep inventory tight and prices elevated. For those thinking about selling in the near future, they may want to assess whether they are comfortable with the higher mortgage rates or if they are better off waiting for a more favorable market.

Conclusion

While the decision to sell a home has always been influenced by a variety of factors—financial goals, family needs, life changes—interest rates are playing a pivotal role in the current housing market. For many homeowners, the allure of low-interest rates from the past few years is still fresh in their minds, and the thought of stepping into a much higher mortgage payment is enough to keep them from selling. This reluctance to move, combined with low housing inventory levels, is continuing to drive up home prices, even as mortgage payments have soared. Housing inventory and the real estate market’s future hinges on interest rate changes, but for now, the combination of low inventory and high mortgage rates means that home sellers are staying put for longer—and that could have long-lasting effects on the market.

Low housing inventory and its downstream repercussions are tough to deal with on your own. Contact us today if you’d like to learn how to succeed despite the difficulties.