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The Federal Reserve has a dual mandate: maximum employment and price stability. When inflation began creeping up (eventually hitting a four-decade high), the Fed took action. The Fed raised interest rates 11 times in less than two years, and as a result, mortgage rates<\/a> skyrocketed. The historically low mortgage rates people were used to, were gone. So anyone who locked in a below-market rate, or were simply mortgage free, held onto their homes<\/a> because to sell would mean giving up an insanely low rate that may never return.\u00a0<\/p>\n What that\u2019s done is exacerbate an existing housing supply crunch. The country is missing anywhere between two million and seven million homes. The lock-in effect only made that worse by curbing for-sale inventory, despite there being some demand. The housing market froze, and existing home sales<\/a> fell to their lowest point in almost 30 years. Things have improved since, but we\u2019re not in the clear by any means, and there will likely be reverberations felt across the housing market for decades, by one chief executive\u2019s prediction.\u00a0<\/p>\n \u201cWhat the Fed did,\u201d Redfin\u2019s CEO Glenn Kelman said, \u201cwill have a 30-year tail on it. There\u2019s going to be low supply for a long time to come unless America really gets [religious] again about building houses.\u201d<\/p>\n In an interview<\/a> with Yahoo<\/a> Finance, Kelman mentioned that supply went up for the first time in eight months in February; he called it a \u201ctiny break in the inventory logjam.\u201d And he does see that continuing to improve.\u00a0<\/p>\n \u201cWe need more listings, especially of single-family homes,\u201d he said. \u201cConsumer demand is still strong enough that prices keep going up. Home affordability is the big issue for almost every homeowner and every potential homebuyer. We need more supply.\u201d\u00a0<\/p>\n So how far do mortgage rates need to fall until we get that increase in much-needed supply?\u00a0<\/p>\n When they drop from 7% to 6%, and then 5%, it\u2019ll unlock more inventory, Kelman said. But there are also a number of people who deferred their plans, and they can only wait so long. (The average 30-year fixed mortgage rate<\/a> is currently 7.11%).\u00a0<\/p>\n \u201cMany of the customers that we\u2019re talking to today still don\u2019t want to give up their 30-year mortgage at 2.5% or 3%, but they\u2019ve just outgrown the house and they finally have to let go,\u201d he said. \u201cI do think that even if interest rates don\u2019t come down significantly, we are going to see a modest uptick in inventory\u2014but to see a big gain, you\u2019re going to have to see a real drop in mortgage rates.\u201d<\/p>\n Still, supply is a much larger and longer-term issue that won\u2019t be solved once mortgage rates fall. The only way to really solve it is by building more homes. Fed Chair Jerome Powell said as much while testifying to Congress earlier this month. \u201cThe housing market is in a very challenging situation right now,\u201d Powell said<\/a>. \u201cProblems associated with low rate mortgage [lock-in] and high [mortgage] rates and all that, those will abate as the economy normalizes and as rates normalize\u2026 But we\u2019ll still be left with a housing market nationally, where there is a housing shortage.\u201d<\/p>\n Kelman mentioned recent legislation in California that pushed for more accessory dwelling units and fewer environmental reviews. (We know the California Environmental Quality Act has been used time and time again to block development<\/a> in the state). \u201cThat was a breakthrough that has now been mirrored in the federal government,\u201d Kelman said, referring to President Joe Biden\u2019s State of the Union address earlier this month, where he mentioned cutting red tape to build housing.\u00a0<\/p>\n The chief executive touched upon the Biden administration\u2019s recently released housing plan too, which includes a tax credit for buyers and sellers (which reveals<\/a> that Biden knows nobody wants to sell their home right now). Kelman said former President Barack Obama did something similar when the country was at the \u201cabsolute bottom of the Great Financial Crisis,\u201d and it had a meaningful effect on the housing market, to the extent that when it expired, there was a blip. That being said, he does believe Biden\u2019s legislation would have an impact if it passes\u2014but that\u2019s the hard part.\u00a0<\/p>\n \u201cI wouldn\u2019t bank on any legislation being passed right now,\u201d he said. \u201cThe government is so dysfunctional, but I still think it\u2019s very positive that we\u2019re having this conversation at the federal level\u2014definitely at the local and state level, it has been a massive issue.\u201d\u00a0<\/p>\n Both Democrats and Republicans want to build housing, Kelman said, which in itself is good news for the housing market, and \u201cmillennials who really need a place to live.\u201d<\/p>\n<\/div>\n\nSubscribe to the CFO Daily newsletter to keep up with the trends, issues, and executives shaping corporate finance. Sign up<\/a> for free.<\/div>\n