The Downside to Low Mortgage Rates? Tight Inventory

July 21, 2020

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Homeowners with rock-bottom mortgage rates move less to avoid losing their great financing – but it could make today’s listing inventory problem a decade-long event.

CHICAGO – Record low mortgage rates can save buyers money when financing a home purchase – but those rock-bottom rates may make it more difficult for first-time buyers in the future.

First-time home buyers face fierce competition due to listing shortages, a trend that hasn’t eased due to the pandemic or recession.

But as the economy eventually recovers and mortgage rates rise again, today’s buyers or refinancers may be tempted to hold onto their properties longer. That, in turn, could hurt future first-time buyers in their search for starter homes if their current owners decide not to sell.

If “rates move up and you want to trade up to a bigger home, you not only have to pay more for the bigger home, but you would also have to pay more to borrow money,” says Danielle Hale,’s chief economist. “That starts to make it less appealing to trade up.” As a result, “there could be fewer entry-level properties for resale. It creates a scarcity of homes for first-time buyers.”

For the week ending July 16, the 30-year fixed-rate mortgage dipped to a record low average of 2.98%, Freddie Mac reports. Those who snag rates that low may face a “locked in” situation, which was considered one factor that prevented homeowners from moving in the recent past. When looking at rates and home listings from 2013 to 2018, Black Knight found that homeowners with low fixed-interest rates were the least likely to list their homes for sale.

“Prior to the pandemic, we did see homeowners’ mobility trending lower over the last few years,” says Joel Kan, an economist with the Mortgage Bankers Association. “We’d also seen an increase in home improvement spending. Low rates could play a part in this increased homeowner tenure.”

Source: “Low Mortgage Rates Could Hurt First-Time Home Buyers for Years,”® (July 16, 2020)

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