Since last October's rates hit a 23 year high, rates have plunged to 6.47% for the week ending Aug. 8, the lowest they’ve been in over a year before ticking up slightly. The Realtor.com® 2024 midyear forecast predicts rates will dip further to 6.3% by year’s end.
Homebuyers should be happy to hear this, but the question remains: What will happen once mortgage rates continue to fall? And what else might shift in the housing market in ways buyers might not see coming—in terms of home prices, the number of homes for sale, and beyond?
Here’s what homebuyers can expect, and how they can prepare to make the most of this opportunity once lower rates hit.
Mortgage rates will likely decline gradually
Though mortgage rates have fallen since their peak in October 2023, they’re still way above the 2022 lows of around 3%.
In other words, the roller-coaster ride isn’t over.
The drop has occurred largely as a result of encouraging signs that inflation is easing and that the Federal Reserve will be cutting the federal funds target rate sooner rather than later.
The Fed had been raising interest rates since early 2022 to bring down inflation. In July, it signaled it would be cutting rates this fall in response to cooling inflation. Mortgage rates often move in the same direction as the Fed’s rates—so when the Fed lowers its rates, mortgage rates are likely to drop, too.
But homebuyers shouldn’t expect a radical overnight change.
Roughly 86% of outstanding mortgages have a rate of 6% or below, meaning rates will need to continue to trend lower to see a fully reenergized housing market.
Homes may not become more affordable
For every 1% drop in mortgage rates, there are 5 million more households that qualify for homeownership.
Potential homebuyers who’ve been hanging out on the sidelines, waiting for median home prices to drop alongside interest rates, may want to brace themselves: Prices are rising—as of now.
If lower mortgage rates spark more buyer demand than inventory can keep up with, then prices may climb once again, eliminating the impact of lower rates.
What this means is that not only will more buyers start searching for homes, but many might also resort to offering over the asking price. Waived appraisals and shortened inspection timelines are also likely to make a comeback.
Homebuyers may have to put in more offers
Buyers can prepare for the possibility of heightened competition by homing in on their preferences and budget.
Though overall housing inventory remains below pre-COVID-19 pandemic levels in much of the U.S., there are more homes for sale than the same time last year.
Buyers will trade high rates for a more challenging market
Once rates start to drop, it’s going to be a trade-off for homebuyers: rates versus competition.
“One of the most basic principles of economics is that when supply is limited and demand is heightened, the price of the goods increases,” says Taggart. “For buyers, we can anticipate increased competition that will drive up the prices of homes and make the homebuying process more stressful and difficult.”
If you see a home you love, don’t wait
The key is to act strategically in this evolving market, if a shopper finds a home that fits their needs and is in budget, then it makes sense to move forward.
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