Falling Mortgage Rates Could Spur California Housing Market in 2023

For many months now, we’ve heard about tight inventory conditions within the California real estate market. And it’s true. While supply levels have increased a bit over the past year, they’re still relatively low compared to the number of buyers seeking homes.

But a new report suggests that falling mortgage rates could encourage more and more California homeowners to list their properties throughout the rest of 2023.

Currently, many homeowners are reluctant to give up their low mortgage rates by selling, since they’ll have to purchase another property. But a steady decline in rates could change the psychology and bring more properties under the market.

That would be a positive development for California home buyers, especially with the supply shortage we’ve been grappling with.

Homeowners Reluctant to Give Up Low Rates

Earlier today, Realtor.com published the results of a new survey of homeowners in California and nationwide. They teamed up with the market research company HarrisX to survey homeowners who are planning to sell their homes in the near future.

Among other things, this survey found that 82% of homeowners were reluctant to sell because of the low mortgage rates they currently have. Many of these homeowners have mortgage rates that are lower than current market rates. So they could potentially end up with a higher interest rate on their next purchase.

Danielle Hale, the chief economist for Realtor.com, explained it like this:

One positive aspect that came out of the pandemic was historically low mortgage rates — and many people took advantage of this opportunity to buy their first home, upgrade to a more expensive home or refinance the home they were in. Unfortunately, this comes with a bit of a catch-22, as homeowners who locked in a 30-year fixed rate in the 2-3% range don’t necessarily want to give that up in exchange for a rate in the 6-7% range.

This is one reason why California real estate market inventory continues to hover at a historically low level. We have a situation where a lot of homeowners want to sell (and possibly relocate elsewhere), but they’re concerned they might end up with a higher mortgage rate than the one they have right now.

The good news — for California home buyers and sellers alike — is that mortgage rates have been trending downward in recent weeks. And some experts believe this trend will continue through the rest of 2023.

Mortgage Rates Trending Downward in 2023

According to a report released by Freddie Mac on April 13, the average rate for a 30-year fixed mortgage dropped for the fifth consecutive week. Rates averaged 6.27% last week,  which is quite a bit lower than the 7.08% peak reached back in November of 2022.

More importantly, there is a chance that mortgage rates could continue to decline into the summer of 2023, and beyond.

Last month, for example, the Mortgage Bankers Association issued a forecast that predicted a gradual decline in rates this year. They expect the average for a 30-year fixed home loan to fall to around 5.3% by the fourth quarter of this year. The industry group predicted further declines stretching into 2024 as well.

More Sellers Could Enter the Market

If rates continue along their current downward trajectory, it could entice more California homeowners to list their properties for sale. It could ease some of their concerns about having to buy another home with a mortgage loan.

And some homeowners have less flexibility, when it comes to “timing” the mortgage market. According to the Realtor.com survey mentioned earlier, 25% of respondents said that they have to “sell soon for personal reasons.”

These and other factors could lead to an increase in the number of homes for sale across the state of California, as we move through spring and approach the summer of 2023.

In addition to encouraging more sellers to list their homes, falling mortgage rates could increase affordability or home buyers across the state.

As you probably already know, housing market affordability declined sharply from 2020 to 2022. The COVID pandemic caused a statewide surge in home-buying activity that made home prices skyrocket like never before. We also witnessed a sharp increase in mortgage rates that started in January 2022 and continued through most of last year.

Now, however, there are signs that housing market affordability could improve through the rest of 2023. California home prices have actually declined a bit over the past few months, and mortgage rates have dropped as well. Both of these trends have increased affordability for local buyers.

If rates continue to fall going forward, it could offer two major benefits for California home buyers. It could help increase inventory by luring more sellers into the market, while helping buyers reduce their monthly mortgage rates and housing expenses.