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How far must mortgage rates fall to increase inventory? Here’s what experts say
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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.
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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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Borrowing from your home equity can be a wise way to improve your financial health, especially in today’s economy. For example, you can tap into home equity to fund home renovations that may improve your home’s value. Similarly, home equity loans and home equity lines of credit (HELOCs) typically offer lower rates than credit cards and other types of borrowing products, making them a useful option for consolidating debt and reducing interest costs. And with Americans sitting on an average of $319,000 in home equity currently, these loans may offer higher borrowing limits than other options.
Current economic factors, including inflation and interest rates, are also boding well for borrowers right now, making it an even better time to consider this type of borrowing. For starters, the Federal Reserve is confident enough in the downward inflation trend to cut the federal funds rate at the last three Fed meetings. While the Fed doesn’t set mortgage rates, the federal funds rate influences the interest rates lenders charge on their lending products. While not at pre-pandemic levels, interest rates on home equity loans and HELOCs are slowly improving. The average home equity loan interest rate is currently 8.41%, while the average HELOC interest rate is 8.52% (as of December 19, 2024).
Still, the only economic constant is change. Inflation increased slightly in October, and other factors could alter the borrowing environment going forward. With that in mind, choosing between a HELOC and home equity loan will depend on your financial goals and how these products respond to changes in the market. Let’s explore which of these two home equity options might make sense for your situation.
Start comparing your home equity borrowing options online now.
Why a HELOC could be better than a home equity loan in 2025
HELOCs work like credit cards, offering a line of credit that can be borrowed from multiple times (up to the credit limit). This type of home equity borrowing can be a useful option if you want to use funds as needed over time, as opposed to getting one large lump-sum payment like a home equity loan. For example, if you’re renovating your home with multiple projects, a HELOC lets you access funds as needed for each phase, helping you avoid borrowing more than necessary upfront.
Just remember, HELOC repayment terms usually start with interest-only payments for a set number of years, typically five or 10 years.
“This is for someone who wants a low starting monthly payment, but keep in mind you may not be paying off all the principal,” says Adam Spigelman, senior vice president at Planet Home Lending. “If you borrow $50,000 and you make interest-only payments for five years, at the end of five years, you’ll still owe $50,000.”
Also keep in mind that HELOCs have variable rates that are tied to an index such as the prime rate, which is typically around 3% higher than the federal funds rate. So if you anticipate the Fed’s rate-cutting trend will continue, a HELOC might save you money in the short term. On the other hand, you might think twice about getting a HELOC if you believe rates will increase during your repayment term.
“When that index rate rises, your monthly payment may also rise. That higher payment can leave you with less money in your pocket, which can make it harder to stay out of debt. If the higher interest rate comes at a time when you’re starting to do the principal repayment, it can lead to payment shock,” Spigelman notes.
Find out how affordable the right home equity borrowing option could be today.
Why a home equity loan could be better than a HELOC in 2025
If you’re looking for more predictable financing, you may prefer a home equity loan for its fixed interest rate and monthly payment that remains the same during the life of the loan, regardless of rate adjustments.
“A home equity loan is a fixed rate and doesn’t fluctuate based on what the Federal Reserve does,” says Jeremy Schachter, branch manager at Fairway Independent Mortgage Corp. “So when the rates come down, your fixed rate doesn’t go down.”
While the Fed’s ongoing rate cuts might reduce borrowing costs on HELOCs in 2025, a home equity loan might be a better long-term option if you expect rates to rise during your loan term.
Home equity loans are a great option if you need a large, lump-sum payment to fund a large expense. You might use one to fund a major home renovation, consolidate high-interest debt or even cover your child’s college tuition. Since home equity loans often have lower rates than private student loans, they may help you save money in the long run.
Should you borrow from your home equity now or wait?
Deciding whether to borrow now or wait until 2025 or later depends on your financial situation, goals and borrowing preferences. As Schachter explains, the type of loan you choose matters, as fixed-rate and variable-rate options affect how your monthly payments change over time.
“Depending on your needs and goals with the funds for the loan, it may make sense not to wait to take out a HELOC because it does change with rates changing. If you are looking for a home equity loan, it may make sense to hold off until next year if your projects or use of the funds can be pushed out,” says Schachter.
The bottom line
Heading into 2025, the choice between a home equity loan and a HELOC comes down to how stable you want your payments to be, and which direction you anticipate interest rates are trending. So, take time to weigh the pros and cons of each option and how they might impact your budget. Finally, remember that home equity loans and credit lines are secured by your home, so you should never borrow more than you need, and make sure the payments fit comfortably into your budget before signing for one.
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