This article was written by Aziz Sunderji, Principal and Chief Economist at Home Economics, and Mike Simonsen, Chief Economist at Compass, the largest residential real estate brokerage in the United States by sales volume.
A few weeks ago, we posted a poll on X.com. It split the community. The question: What’s your expectation for housing inventory if mortgage rates fall persistently below 6% in the next year?
The results revealed no consensus: 44% predicted inventory would rise, 30% said it would fall, and 25% expected no change.
Credible arguments on all sides
Those who argue lower rates will raise inventory primarily cite the release of mortgage rate “lock-in.” Millions of homeowners hold mortgages below prevailing rates, finding it punitive to list their homes and sacrifice that advantage. As rates fall, the thinking goes, this penalty diminishes—and the resulting surge of sellers would overwhelm any concurrent rise in demand.
The opposing camp argues that while lower rates may indeed ease lock-in and boost listings, the concurrent rise in demand will prove larger. The net effect: falling inventory.
A third camp emphasizes economic context. They argue that what happens to inventory as mortgage rates fall depends on the economic context: if growth is weakening, the drop in demand will dominate and inventory will rise. But if the move in rates is a response to cooling inflation rather than weaker growth, then the rise in demand could outpace the rise in listings, pressuring inventories lower.a
This is, of course, something we can test empirically.
Recent evidence favors those predicting inventory declines. During both the Great Financial Crisis and the Covid recession, lower rates drove inventory lower as climbing sales outpaced rising listings.
But a longer-term analysis complicates this picture. Using NAR data stretching back to the 1980s, a more nuanced relationship emerges.
Historical rate declines and inventory
NAR has tracked inventoryb and sales since 1982. We can impute listings using a simple identity: listings equal the change in inventory plus sales. Figure 1 overlays these three series with mortgage rates.
Rate regimes and inventory
Over the past 50 years, we identify seven periods of meaningfully declining mortgage rates. What can these episodes teach us about the relationship between rates and inventory?
Three patterns emerge from our analysis:
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- A fourth camp argues that since all sellers are buyers, inventory shouldn’t change. This ignores the constant flow of individuals entering and exiting homeownership, multi-property owners, and investor behavior—all representing transactions without matching buyers and sellers.[↩]
- Total inventory, including condos, co-ops, and single-family homes.[↩]