Ultra-low mortgage rates are great for spurring demand, but in the post-pandemic era, have had the unintended consequence of restricting market turnover and limiting normal supply.

Existing-home inventory makes up the bulk of available home inventory, but many existing homeowners bought or refinanced into sub-3% mortgage rates over the course of the pandemic.

It adds up to a set of “golden handcuffs” for many homeowners, also known as the “rate lock-in effect,” a primary culprit in the ongoing housing shortage.

According to the Federal Housing Finance Agency (FHFA), 84% of all outstanding mortgages have a mortgage rate at or below 5% and 63% have rates below 4%.

These low rates serve as a strong financial disincentive for a huge swath of existing homeowners to sell their current abodes and buy new “move-up” homes. The average time a homeowner stays in the same home has ballooned to a record-high 10.5 years.

But there could be hope on the horizon for housing’s low inventory. There’s another large group of homeowners not so deterred by higher mortgage rates – those without a mortgage on their home at all!

Also called “free and clear” homeowners, they may hold the key to unlocking more supply and, in turn, more home sales.

In 2021, 42% of all homes were owned free and clear, up from 34% in 2011. Additionally, there are quite a few homeowners that have very low remaining mortgage balances, making them more or less immune to rate-lock, as well.

Not surprisingly, nearly 78% of free and clear owners are aged 55 or older. As the massive Baby Boomer generation has aged, the share of homes owned free and clear has increased.

However, many seniors today are choosing to age in place, some with the help of the reverse mortgage option. When free-and-clear inventory comes to the market in the next decade, it may trickle in slowly.

But as these homeowners move into later stages of life, there should be a resultant surge in the downsizing and relocation more typical of younger seniors in the past.

Some indicators of this transition may already be appearing. Pending home sales have ticked higher for two consecutive months to start 2023, and February saw its largest monthly increase since June 2020. February existing home sales rose a surprising 14.5%.

Housing demand is still greater than supply. Even though there are relatively few buyers now amid low inventory, sales are likely to strengthen.