Why We Can Blame Low Housing Inventory on High Interest Rates

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Real estate inventory is unlikely to increase until mortgage rates drop. Read on to see why. 

If you’ve been struggling to buy a home this year, you’re no doubt in good company. Not only has it gotten expensive to take out a mortgage, but home prices are high, too. We can thank low inventory for that.

The basic laws of supply and demand tell us that any time there’s a shortage of a given commodity, its price tends to rise. That’s what’s going on in the housing market today.

As of the end of March, there were only 980,000 unsold homes on a national level, according to the National Association of Realtors. That represents a 2.6-month supply of available homes.

But it commonly takes a six-month supply of homes to meet buyer demand in full and equalize the housing market so that neither buyers nor sellers have the upper hand. Right now, sellers are still getting away with commanding higher prices because they know buyers don’t have a lot of options.

If you’re hoping home prices will come down in the near term, then what you really need to hope for is a rise in real estate inventory. But that’s not likely to happen until mortgage rates drop. Here’s why.

Today’s homeowners aren’t that motivated to sell

For the most part, people who own homes today aren’t very eager to sell them. The reason? A lot of people are paying off mortgages at much lower rates than the rates we’re seeing today.

In fact, a lot of people went and refinanced their mortgages when borrowing rates fell to record lows in 2020 and 2021. Back then, you could easily sign a 30-year mortgage at around 3% if you had good credit.

At this point, the average 30-year mortgage rate is around 6.4%, as per Freddie Mac. But why would someone with a 30-year, 3% mortgage put their home up for sale and risk having to sign a new mortgage at double the interest rate or more? It just doesn’t make sense.

Even homeowners who didn’t refinance their mortgages in 2020 and 2021 may be sitting on mortgage rates that are lower than 6.4%. And just as someone with a 3% mortgage wouldn’t want to swap it for a 6.4% mortgage, so too might someone paying 4.5% or 5% on a mortgage not want to see their interest rate increase.

That’s why it’s easy to point to high interest rates for mortgages as the reason housing inventory is stuck in a slump. And unfortunately, we may not see a drop in rates — or an uptick in inventory — for quite some time.

A tough housing market to navigate

Even though today’s homeowners generally aren’t so motivated to put their properties up for sale, there are always some exceptions. In any given neighborhood, there’s apt to be someone — even if it’s one out of 100 homeowners — who needs to move to be closer to family or to pursue a job. So even though housing inventory is low right now, at least it’s out there.

But it could take a while for mortgages to get cheaper. And until that happens, buyers might find themselves duking it out with others to go after the limited properties that manage to show up on the market.

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