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How far must mortgage rates fall to increase inventory? Here's what experts say

It could take more than just a drop in mortgage rates to increase home inventory, experts say. Getty Images

While the inflation rate is down compared to recent highs, persistent inflation is continuing to impact many people's wallets, as the cost of everything from gas and food to housing has increased substantially over the last couple of years. To combat it, the Federal Reserve has kept its benchmark rate paused at a 23-year high

As a result, today's mortgage rates are much higher than they were in 2020 and 2021 during the height of the pandemic. This has led to many existing homeowners remaining in their homes to keep their sub-3% mortgage rates rather than moving and buying a home at a higher rate. Despite this, housing inventory grew by 1.21 million units in April, according to data from the National Association of Realtors. However, inventory is still lower than it was before the COVID-19 pandemic.

But could a drop in mortgage rates encourage existing homeowners and further increase housing inventory? Here's what to know.

Find out what today's top mortgage rates are here.

How far must mortgage rates fall to increase inventory? Here's what experts say

According to some experts, mortgage rates need to drop at least 1% to 2% from today's rates — which currently hover near 7% on average — to encourage existing homeowners to sell their homes 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 have to fall below 5% to see any significant movement in housing inventory, says 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, agrees. 

"To get existing homeowners to move away from the 4% mortgages they currently have, I believe rates would need to fall to 5%," says Durham.

Ready to buy a home? Compare mortgage rates and start the preapproval process here.

Other factors that could impact housing inventory 

Other factors could also help to spark an increase in inventory, experts say, including:

Delinquency rates

White says we could see an uptick in inventory if the recent delinquency rates lead to wider 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," says White. "Those non-QM loan pools that investors bought are not performing well."

Because of those factors, White thinks another foreclosure crisis could be possible. And, if that happens, there could be an increase in homes for sale and a decrease in rentals, says White.

Mortgage rate stabilization

Richard Ross, CEO of Quinn Residences, believes that a decline in rates wouldn't help to increase inventory as much as a stabilization in rates could.

"I believe that it's not necessarily the current level of rates, but rather that people need to feel that rates have stabilized and will not be as volatile as they have been recently, " says Ross.

The days of below 5% mortgage rates are over, Ross says. And if homeowners come to this same conclusion, that will likely open up the inventory floodgates.

New home construction 

Durham says an increase in new construction may be the most significant factor in terms of increasing housing inventory.

"For that to happen, we will need to see more local and state governments easing regulations and providing tax incentives to some of the fears builders have regarding the economy," Durham says. "This should specifically target affordable home building and not just higher-end home production."

New construction is a major factor, Kaminski says, noting that there has already been a shift within new constriction as the supply of existing homes has become constrained. 

"New home construction is essential to bridge the national housing deficit left behind due to underbuilding over the last two decades," says Kaminski. "New home construction now makes up over 31% of all homes for sale, and historically this number has been closer to 13%." 

The bottom line

Mortgage rates might need to fall by at least 2% to increase inventory, some experts say. However, there may be other factors, such as new construction and delinquency rates, that could also play a key role. 

"A significant surge in inventory levels could help bring stability to the market by providing more options for homebuyers, reducing home prices, and simply balancing the supply and demand scale," Kaminski says.

That said, 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%. For example, applying for a 15-year mortgage could be one way to obtain a lower mortgage rate, but only if you can afford the higher monthly payments that come with them. And, keep in mind that comparing rates and fees from at least three to five lenders could help you get the best rate for your unique circumstances.

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