1% mortgage rate drop could unlock frozen U.S. housing market Oxford Economics says

A modest 1% drop in mortgage rates could be enough to begin thawing the frozen U.S. housing market, according to Oxford Economics. While mortgage rates currently hover in the high 6% range, a decline to below 6% may serve as an incentive for some homeowners to sell and trade up, despite the broader market remaining constrained by high borrowing costs [1]. The key challenge lies in the reluctance of homeowners who locked in low-rate mortgages during the pandemic and are unwilling to give them up for current, higher-rate conditions [2].

Bob Schwartz, a senior economist at Oxford Economics, emphasized that while there is no specific "threshold" rate that would trigger a surge in home sales, a drop to below 6% could encourage enough sellers to list their homes and potentially reignite buyer activity. This could create a ripple effect, helping to restore a sense of movement in a market that has become stagnant amid elevated rates and tight inventory [3]. Schwartz noted that while a more significant rate decline would be needed to broadly motivate homeowners off the sidelines, even a smaller drop could be meaningful in the current environment [4].

High home prices also remain a major obstacle to affordability, even if mortgage rates were to drop. According to a recent Zillow report, a 0% mortgage rate in some U.S. cities would not necessarily make housing affordable due to the fact that home prices have risen by more than 50% since the start of the pandemic [5]. This indicates that while lower rates can ease monthly payment burdens, they do not address the underlying issue of inflated property values, which continue to deter potential buyers [6].

Another potential impact of a rate drop lies in the surge of refinancing activity. With $34.5 trillion of housing equity currently sitting with homeowners, a significant increase in refinancing—especially cash-out refinances—could boost consumer spending and stimulate broader economic activity [7]. However, Schwartz noted that such a scenario would require a more substantial decline in mortgage rates than is currently forecast by Oxford Economics [8].

The upcoming Federal Reserve meeting in September will remain a key focal point for mortgage rate expectations. While recent inflation data showed a modest 0.2% increase in July, bringing headline inflation to 2.7%, it still remains above the Fed’s 2% target. Oxford Economics anticipates that the Fed will likely delay rate cuts until December unless the upcoming August jobs report shows signs of a weak labor market, similar to the disappointing July report [9].

Though the possibility of a 1% mortgage rate drop remains theoretical, the analysis from Oxford Economics highlights the sensitivity of the housing market to even small changes in borrowing costs. With inventory remaining low and competition high, any sign of a more favorable rate environment could provide the necessary spark to reignite buyer and seller activity in a market that has become increasingly hesitant due to economic uncertainty [10].

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[1] Even a 1% mortgage rate drop could be enough to ‘unlock’ the frozen housing market, Oxford Economics says (https://fortune.com/2025/08/13/mortgage-rate-drop-frozen-housing-market-oxford-economics-interview/)