I think to some extent reading has a binary aspect - either a kid can pick up a given piece of everyday text and read it more or less fluently, or she can't. And absent LDs or other special circumstances, most kids fall on the "can" side of the divide by third grade. I've always assumed that must be the origin of the conventional wisdom. As an early reader very invested in my identity as such when I was a kid, I remember my mild chagrin at 7 or 8 when my best friend was reading aloud from the Little House books and I realized she could do it just as well as I could. Of course that doesn't mean that the evening out occurs across all domains, just that most kids have mastered the mechanics of reading such that a fluent reader no longer stands out. The early readers, of course, may have a much larger vocabulary and be learning lots of higher-level skills, but those things aren't instantaneously apparent in the way that a kindergartener reading The Hobbit or Harry Potter is.
Well put. What is generally meant by "evening out" by 3rd grade is that all students are able to read what is required of them by 3rd grade with exceptions of kids with LDs. So, if the school requires all kids to be able to read the Magic Treehouse series by 3rd grade, it is possible that the late readers have learnt enough of the mechanics of reading by that time and are capable of reading those books.
