While inflation rates have dropped compared to recent highs, persistent inflation continues to strain many people’s wallets, with significant increases in the cost of gas, food, and housing over the past few years. To combat this, the Federal Reserve has maintained its benchmark rate at a 23-year high.
As a result, today’s mortgage rates are much higher than during the pandemic’s peak in 2020 and 2021. This has led many homeowners to stay put, clinging to their sub-3% mortgage rates rather than moving and buying homes at higher rates. Despite this, housing inventory grew by 1.21 million units in April, according to the National Association of Realtors, although it remains lower than pre-pandemic levels.
Could a drop in mortgage rates prompt existing homeowners to sell and increase housing inventory? Here’s what experts say.
How Far Must Mortgage Rates Drop to Increase Inventory?
Experts suggest that mortgage rates need to drop by at least 1% to 2% from current levels, which hover near 7% on average, to encourage homeowners to sell their properties and increase inventory.
“If mortgage rates began to steadily fall to 6% or lower, a cache of homeowners could be released from the lock-in effect created by the lower-than-normal mortgage rates seen during the pandemic,” says Kate Kaminski, COO of Walton Global.
Mortgage rates would likely need to fall below 5% to see significant movement in housing inventory, according to Michelle White, national mortgage expert at The CE Shop, an online educational resource for real estate and mortgage professionals. Brian Durham, vice president of risk management and managing broker at Realty Group LLC and Realty Group Premier, concurs, stating, “To get existing homeowners to move away from the 4% mortgages they currently have, I believe rates would need to fall to 5%.”
Other Factors That Could Impact Housing Inventory
In addition to mortgage rates, several other factors could spark an increase in housing inventory:
Delinquency Rates
White notes that inventory might increase if recent delinquency rates lead to more foreclosures. “Some analysts are now suggesting that the looser underwriting requirements of non-QM loan originations in 2022 are contributing to the uptick in delinquency rates in 2023 and 2024,” she says. A rise in foreclosures could boost the number of homes for sale and reduce rental properties.
Mortgage Rate Stabilization
Richard Ross, CEO of Quinn Residences, believes that stabilizing rates could help increase inventory more than a decline in rates. “People need to feel that rates have stabilized and will not be as volatile as they have been recently,” says Ross. He suggests that the era of sub-5% mortgage rates is over, and accepting this could open the inventory floodgates.
New Home Construction
An increase in new home construction may significantly impact housing inventory. “We will need to see more local and state governments easing regulations and providing tax incentives to address builders’ economic concerns,” says Durham. This should specifically target affordable home building. Kaminski echoes this, highlighting the importance of new home construction in bridging the national housing deficit. “New home construction now makes up over 31% of all homes for sale, compared to a historical average of closer to 13%,” she says.
The Bottom Line
Experts say mortgage rates might need to drop by at least 2% to increase inventory. However, other factors such as new construction and delinquency rates could also play crucial roles.
“A significant surge in inventory levels could help stabilize the market by providing more options for homebuyers, reducing home prices, and balancing the supply and demand scale,” Kaminski says.
If you’re in the market for a home, you don’t necessarily have to wait for rates to fall to get a mortgage rate under 7%. Applying for a 15-year mortgage could be a way to secure a lower rate, though it comes with higher monthly payments. Additionally, comparing rates and fees from at least three to five lenders can help you find the best rate for your unique circumstances.
