Mortgage rates are falling. Will it offer buyers any relief?
Mortgage rates are falling. Will it offer buyers any relief?
This time last year, mortgage rates were still climbing, closing in on 8%. As recently as the end of May, they were averaging 7%. Then, months before the Federal Reserve announced it was cutting interest rates, they started falling. Today, the average on a 30-year fixed is around 6%, with some lenders offering below six to qualified buyers.
The thing so many people have been waiting for is happening — mortgage rates are coming down.
“On its face, definitely, that feels like good news for a lot of prospective homebuyers who have been sidelined from the market because of lack of affordability and lack of inventory,” said Chris Salviati, a senior housing economist at Apartment List.
A lot of people who feel ready to buy, and have for a while, have been holding out, hoping for a bit of a break from this historically expensive housing market.
“Over the past five years, the median home price has increased by 50% nationally,” Salviati said. “That’s before you even take into account the increasing mortgage rates.”
The math, especially for a lot of first time buyers, just hasn’t been working.
How much of a difference could falling rates make?
On the median-priced home, which is now over $400,000, “maybe the monthly mortgage payment comes down by a couple hundred dollars a month,” Salviati said. “So that’s meaningful for folks on the margin.”
But, that’s only if home prices stay the same as rates come down, which is far from a guarantee.
Instead, “it’s completely feasible that we could just see price growth increase, and just eat up any of the benefit that would even come from falling mortgage rates,” Salviati said.
That is what you would expect to happen in a normal housing market. But according to Lisa Sturtevant, chief economist at Bright MLS, this is not a normal market.
“This is a very weird market,” she said. “It’s getting so hard to use the traditional fundamentals of demand and supply to predict this housing market and frankly, this economy, since everything’s so weird.”
What’s weird about it? The record run up in prices over the last few years, for one thing.
“Then of course we have the record low mortgage rates, followed by the record surge in mortgage rates, which has created this lock-in effect,” Sturtevant said. “That is an unprecedented market that we see ourselves in.”
Even that mortgage rate spike of the last couple years didn’t do much to bring prices down, as it might have in a more normal market.
So, what happens to prices in this “weird” housing market now that mortgage rates are falling? It’s anyone’s guess.
“Normally falling rates bring more buyers into the market, but in this market, they’re also bringing a lot more sellers into the market,” Sturtevant said. “So, we’re seeing both demand and supply on the rise, which could help balance prices, as opposed to sending prices up higher.”
Realistically, Sturtevant believes that is probably the best-case scenario for buyers.
But Daniel McCue, a senior research associate at Harvard’s Joint Center for Housing Studies, said it is also possible that mortgage rates will fall just enough to lure more buyers into the market, but not more sellers.
“A lot of the mortgage holders are still holding mortgages that are pretty far below market,” he said. “Almost 75% of them have an interest rate below five, and one out of every five mortgage holders has an interest rate below three.”
So even though rates have come down to around 6%, from nearly 8% last fall, it could still be a while before it feels worth it to many homeowners to sell.
Daryl Fairweather, chief economist at Redfin, said what happens next will depend somewhat on where you live — all real estate is local.
In dense, coastal markets in the northeast, where there’s little new construction, it’s more likely that prices will just keep creeping up. But in many Southern markets, Fairweather said, “more demand can just result in more construction, so prices don’t end up going up quite as much.”
It’s all about supply. There just isn’t enough of it. And as long as that’s the case, falling mortgage rates will only do so much to make buying a home more affordable.
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