Prepare for the potential interest rate decrease by acquiring a home with this essential information at hand.
Mortgage prices have doubled since 2020, contributing to one of the most expensive housing markets in history's history. Although the Fed doesn't directly control mortgage prices, its activities impact borrowing costs across the economy.
The most noticeable impact: A reduction in interest rates could lessen the upward pressure on mortgage prices, rendering one part of the home-purchasing equation more manageable. This could be positive news for first-time homebuyers and existing homeowners who have shied away from selling their properties in a higher interest-rate climate. However, it could also result in stiffer competition among homebuyers, though.
In reality, mortgage prices have already started to show a steady decline in anticipation of the Fed's expected rate cut on Wednesday. According to Freddie Mac, the average 30-year fixed mortgage rate dropped to 6.20% last week—the lowest level since February 2023—and down significantly from last year's peak of 7.79%.
A single percentage point change in mortgage prices may not seem significant, but it can result in homebuyers saving hundreds of dollars in monthly payments.
Consider, for instance, a house sold for $422,600, the median sales price of a house in the US according to the National Association of Realtors. Assuming the buyer put down a 20% deposit at closing and has a standard 30-year fixed mortgage rate, the buyer could save over $2,600 annually on interest payments if they secure a 6% mortgage rate compared to 7%.
Breaking the commitment impact
Supply has been another main contributor to housing market difficulties: Homeowners who secured ultra-low pandemic-era mortgage rates were less inclined to sell their properties. This has led to more intense competition, frequently resulting in bidding wars for existing houses on the market.
Decreasing mortgage prices might finally weaken that mortgage "commitment" effect.
"There are homeowners who would have preferred to sell already but couldn’t afford their next mortgage due to how high the rates are," stated Daryl Fairweather, Redfin's chief economist. "The more rates fall, the more feasible it becomes for those people to sell their homes and buy again."
However, it's highly unlikely that mortgage prices will fall back to where they were during the pandemic's early days when the Fed slashed interest rates in an emergency move to revive the economy, Fairweather said.
Most analysts anticipate that the Fed will reduce its benchmark interest rate by only a quarter-point on Wednesday. Although further cuts are projected, it's uncertain when they will occur.
"A lot of individuals locked in mortgage rates at around 3%. We're not getting back down that low," she said.
Indeed, Wells Fargo predicts that the 30-year fixed mortgage rate will average 6.5% by the end of 2024 and 5.9% by the end of 2025.
If you purchased a home in 2022 or 2023, the possibility of refinancing your mortgage could seem attractive as rates decrease. Some financial advisors recommend waiting until you can obtain a mortgage rate that is one percentage point lower than the rate you're currently paying, said Fairweather.
"If you got a 7.5% mortgage rate, you may already be in a position to refinance," she said. "If I were in the position of someone who got a high rate, I would likely wait to see where rates are headed."
Two-edged sword?
If you're a potential homebuyer eager to re-enter the market, however, a further drop in mortgage prices could potentially be a double-edged sword.
Although lower prices could provide homebuyers with greater purchasing power, they could also lead to increased competition for homes on the market, further elevating already record-high home prices.
"It's one of those things where you should be careful what you wish for," said Greg McBride, chief financial analyst at Bankrate. "A further drop in mortgage prices could generate a surge in demand that makes it more difficult to actually buy a house."
Another element that might eventually raise demand is the recent rule changes implemented by the National Association of Realtors.
The modifications, which took effect on August 17, are intended to alter the way the 1.5 million NAR real estate experts are compensated when they help people buy and sell homes.
"It's been a bit challenging to navigate the housing market right now because of that rule change," said Fairweather. "I think a lot of buyers are postponing their purchases until next year."
Ultimately, it's difficult to perfectly time the housing market, though speaking to various mortgage lenders to compare their rates can assist you in securing a lower rate.
Although decreasing mortgage prices might make the idea of buying a home more enticing to some, it shouldn't be the sole determining factor, said Leo Pareja, CEO of eXp Realty, one of the largest real estate brokerages in the US.
"I always advise individuals to lock in what they can afford," said Pareja. "Your home is where you raise your family. It's your lifestyle, proximity to activities, school, and various other components. It's not just a return on investment."
The decline in mortgage prices could encourage more homeowners to sell their properties, as lower rates make it more feasible for them to secure new mortgages. Nevertheless, a significant drop in mortgage prices might lead to increased competition among homebuyers, potentially driving up house prices further.
