Homebuyers can't catch a break. Sharply higher mortgage rates made houses more expensive and weakened demand without doing much to lower prices in most of the US. The supply of existing homes shrunk as owners hung on to their low-rate mortgages, slowing turnover and worsening the supply crunch. Now as homebuilders whittle down their inventories, they’re getting ready to phase out the buyer incentives they’ve been offering to counter higher mortgage rates.

Buyers have been holding out hope that they’ll eventually get some relief when mortgage rates start to fall. Sorry, but nope. What homebuyers need is more supply — without that, lower mortgage rates will just create more demand and push up prices for whatever homes are available. The affordability equation won’t change much.

“Lower mortgage rates won't help homebuyers” is not an argument I would have made a year ago. Back then conditions were different. As mortgage rates were rising above 5%, active inventory of homes for sale was rising at its fastest rate since prior to the pandemic. New listings were steady while demand fell off, and homebuilders had 60% more homes under construction than they had prior to the pandemic, a number that was continuing to rise.

It was reasonable to think that as the Federal Reserve aggressively raised interest rates in the coming months, buyer demand would continue to slow while homes for sale would continue to rise. The glut of inventory would be resolved if mortgage rates fell and buyers came back into the market: clear the inventory, improve affordability, help buyers get homes, everybody wins.

Here in April 2023, that’s not how it’s working out. There’s no longer the prospect of an inventory glut as homebuilders cut production and new weekly listings of existing homes remain 20% below levels of a year ago. Housing demand has exceeded supply even with mortgage rates rising above 6.5%.

So here’s what’s likely to happen if mortgage rates fall to somewhere in the range of 5% to 5.5%:

• Rather than lower their prices, homebuilders have been buying down mortgage rates for customers — in many cases offering rates in the range of 5% to 5.50%. So if market rates fall to that level, builders can forgo the buy-downs and just boost profit without doing anything to change affordability. We’d probably see production increases, but that additional supply wouldn’t arrive on the market until the second half of 2024, at best. That’s good in the long run, but not much help to anyone looking to buy in the next year.
• In the resale market, lower mortgage rates would boost demand, particularly from first-time buyers. Housing website Redfin noted last week that while median sale prices in its database are down 2.6% year-over-year, the monthly payment buyers committed to hit a new record high in the week ending April 16, and it’s up 11.6% year-over-year because of higher rates. For a 30-year mortgage, a decline in the rate to 5.5% would increase affordability by around 10%. But without a significant increase in supply, greater competition for each home would push prices higher, so a buyer’s monthly payment wouldn’t change significantly. 
• It's also possible lower costs would bring institutional buyers back into the home market. John Burns Research and Consulting noted last week that institutional investors bought 90% fewer homes in the first two months of 2023 than they did last year, yet even without their participation supplies are tight.

Lower mortgage rates might at least boost transactions. Some homeowners who aren’t willing to trade a 3% mortgage for a 6.5% rate might be somewhat more open to selling at 5.5%. But that wouldn’t necessarily increase the inventory on the market — more homeowners swapping houses and mortgage rates might mean more transactions without a structural rise in active inventory.

Buyers need more supply. Period. Homebuilders can provide it over time if conditions remain favorable, but after being spooked by skyrocketing mortgage rates last year they’re likely to proceed cautiously. As the years go by, older homeowners, who own tens of millions of homes, will pass on their homes one way or another. But for now, any modest decline in mortgage rates that homebuyers are anticipating won’t be improving the outlook for affordability.

Conor Sen is a Bloomberg Opinion columnist. He is founder of Peachtree Creek Investments.