While reports show more sellers than buyers in the market, if rates fall, inventory may disappear
One byproduct of elevated interest rates and affordability challenges is that many homebuyers remain on the sidelines. While reports show that sellers outnumber buyers right now, one leading economist believes a rate decline could lead buyers to race back to the market.
It’s unlikely there will be any major rate declines until later in the year. The Federal Reserve held rates steady on Wednesday and likely won’t consider another rate cut until at least September.
But it might not take much of a decline for the current seller surplus to disappear. Lawrence Yun (pictured top), chief economist and senior vice president of research with the National Association of Realtors (NAR), notes that even small changes in rates in either direction have caused changes in home sales.
“It's interesting that even small changes in mortgage rate, say a 20-basis-point change, seem to shift direction in home sales in one month,” Yun told Mortgage Professional America. “They'd be down a little or up a little. So even small changes in the mortgage rate may change the direction of the home sales, going up or down.”
Yun thinks that if the rate drops by half a point or more, the demand for homes would surge.
“Even if we get to a 6.5% average mortgage rate, I think that will provide consistency and a rise in housing demand. And we get to 6%, wow, that's going to be quite the release of pent-up housing demand. Especially in light of the fact that I think consumers are used to 6% and 7% for three straight years.
“And 6% will be considered on the lower end of that range. Consumers will consider that to be a great rate. I think people no longer consider 3% or 4% as a feasibility.”
Homeowners are in a good spot
Because home values have increased, so has home equity. Yun said that, outside of the condo issues in Florida, many homeowners don’t see a need to sell right away.
“The homeowners across the country are in fine shape because of the rise in home prices in recent years, and the foreclosure rate is historically low,” Yun said. “So, homeowners or home sellers are not necessarily in a desperate condition, with the exception of maybe the condominium market in Florida, where some fixed-income homeowners cannot come up with some reserve fund requirements.”
Because most homeowners are not in a position where they need to sell immediately, he doesn’t believe there will be a flood of houses into the market.
“Except for the condo Florida market, the homeowners and condominium owners across the country are in pretty fine shape,” he said. “This means that any supply increase is due to life-changing events, not a forced sales situation. So, I don't expect supply to suddenly ramp up greatly.”
Right now, buyers are struggling with affordability challenges. These challenges apply not only to home prices but also to day-to-day expenses that make qualifying for mortgages more difficult.
“The aspiration of home buying is there, it’s just that financial capacity is not there because of high mortgage rates,” Yun said. “Now we have continuing job addition. So as long as the jobs are being added, that's all potential housing demand out there. It's just that the financial capacity is strained, and that's why I think even small changes in rates are having some impact.”
A rapid increase in demand
A recent Redfin report noted that there are almost 500,000 more home sellers than home buyers right now. While Yun believes the supply of houses will continue to increase steadily, he thinks demand could surge greatly with even a slight decline in the rate, just based on more people being able to qualify for a loan at a lower rate.
“It will be a gradual increase in supply, but the demand can quickly change,” Yun said. “Right now, the demand is restrained because of the high mortgage rate, but if the mortgage rate goes down, then you will have an increase in the number of qualifying borrowers. People who cannot qualify at a 7% mortgage rate, but could easily qualify at a 6% or 6.5% mortgage rate.”
Yun believes a rate decline could quickly turn the perceived home surplus into a home shortage.
Lawrence Yun, chief economist at National Association of Realtors (NAR), believes the Federal Reserve is too focused on tariffs and not enough on other disinflationary factors. He urges the Fed to widen its view for earlier rate cuts. https://t.co/IcIyoRhjqA
— Mortgage Professional America Magazine (@MPAMagazineUS) June 17, 2025
“You would have this increase in potential buyers suddenly changing due to changes in the mortgage rate,” he said. “The surplus situation can quickly change on a dime into a shortage condition, depending upon how the demand changes. Because supply is relatively fixed, not changing quickly, while the demand could quickly go up or down.”
However, a decline in rates could bring more sellers into the market. Economists have talked about the lock-in effect keeping sellers out of the market. Many people with low-interest-rate mortgages might be more inclined to make a move if rates drop closer to 6%.
“The lock-in effect is less strong once the mortgage rate goes down,” Yun said. “The differential between the market rate and what the homeowner currently has is sizeable. People don't want to list their property unless they have to, like for life-changing events like a death in the family, marriages, divorces. Unleashing or getting rid of the lock-in effect will be more pronounced with lower rates.
“What a great thing it will be that we have an increase in supply and an increase in demand once the mortgage rate comes down measurably.”
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