Higher rates have done little to ease the challenges in the housing market; Will lower rates help?

Summer is cruising right along, and the summer housing market is always interesting.  For years now, we have struggled with anemic levels of inventory (homes available for sale).  Spring and summer are when we typically see the largest increase in inventory, but the housing market has not been “typical” for some time.

The story in housing has been the same for years now – There is simply not enough inventory to satisfy the number of buyers looking to purchase homes.  So what will turn the tide and bring more balance to the market?

A quick reminder:  These articles I share here are researched and written by me!  As part of my commitment to ongoing support for my clients and partners, I write these articles to help them understand what’s really happening in the markets, beyond the headlines and soundbites.

There’s an idea that we’ll call the “Rate Lockdown Theory” that suggests that one reason that housing inventory is so low is that many homeowners have mortgage rates of 4% or lower.  These homeowner’s can’t be compelled to sell their home just to buy a new home with rates at 7% or higher.  From logical and mathematical perspectives, it seems to make sense.   But is it supported by the data?

The chart below shows the total available residential housing inventory available in the US going back to 2016.  The chart shows normal seasonal changes that we expect – inventory grows in the spring, peaks in the summer, and bottoms in the winter before climbing again the next spring.

However, during the two most recent low-rate periods – 2020, spurred by the COVID response, and the summer of 2016, triggered by turmoil in the financial markets related to Brexit, we don’t see any appreciable jump in available inventory.  Low rates did not have any effect on the supply-side of the housing market.  In fact, we did not see any seasonal increase in inventory during 2020!

On the flip side, low rates absolutely affect the demand-side of the housing market.  Since lower rates mean lower payments and increased affordability, more buyers will exist in a lower-rate environment.  We can see that from 2020 to 2021, inventory continued to decline – a strong sign of the surge of buyers to the market (motivated by incredibly low rates), effectively wiping out any seasonal increase in inventory.

But interest rates are not the only – or even primary – driver of real estate activity.  While low rates increase home affordability, people ultimately buy and sell homes because of life circumstances.  Whether rates are at 3% or 7%, people will continue to get married, have children, relocate for career opportunities, and all the life events that drive real estate transactions.

With all of this in mind, we should expect that another drop in mortgage rates will not ease the supply shortage that’s plaguing the housing market right now.  Instead, lower mortgages rates will likely only mean more buyers, which means more competition, which is a strong driver of higher home prices.  This challenging dynamic in today’s market underscores the need to work with qualified, competent professionals.

If you found this interesting or helpful, please feel free to share it with a friend, family member, or co-worker – it’s my goal to educate and empower as many people as possible during this incredibly unique time in housing!

Here is how I can help!

• If you are looking to purchase a new home or have questions about the market, getting preapproved, etc., or
• If you are a Realtor or a Broker looking for a lender with great financing solutions to help educate your clients on the state of the market to help them feel good about their decisions,

Please call today – I am happy to help however I can!