Homebuyers who are gearing up to shop for a house this fall might wonder whether the mortgage rate gods will smile in their favor.
They’re right to ponder: Last October, rates hit a 23-year high of 7.79% for a 30-year fixed home loan, according to Freddie Mac.
Since then, 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,” says Charlie Dougherty, director and senior economist at Wells Fargo.
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.
“We are going to see Fed rate cuts before the end of 2024, and they’re going to be bigger than we expected at the outset of the year,” says Realtor.com® Chief Economist Danielle Hale.
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,” says Hannah Jones, senior economic research analyst at Realtor.com.
Homes may not become more affordable
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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.
Indeed, the Realtor.com economic research team expects list prices to rise 4.6% by the end of the year. And falling mortgage rates just might be to blame.
“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,” says Jones.
“Lower financing costs will likely boost demand by pulling affordability-crunched buyers off of the sidelines,” adds Dougherty.
In fact, for every 1% drop in mortgage rates, there are 5 million more households that qualify for homeownership, according to Seth Bellas, a Grand Rapids, MI–based branch manager for Churchill Mortgage.
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,” says Bryson Taggart, senior agent partnership manager for Opendoor. “The good news for buyers is that their power will increase, and they’ll be able to afford more house—they just might need to work harder for it.”
Homebuyers may have to put in more offers
On that note, if at first you don’t succeed, don’t give up.
“Once you’re up against the competition, don’t get discouraged. It can take multiple offers on a home before getting accepted,” says Taggart. “In 2020, I had a client who put in 16 offers before they were accepted. It was a tough journey, but their persistence landed them the home of their dreams.”
Buyers can prepare for the possibility of heightened competition by homing in on their preferences and budget, adds Jones.
Taggart says his best advice is to make sure to include closing costs and down payments in those parameters, and be realistic about what you can afford.
Lower rates could help unleash more homes on the market
Anyone who’s searched for a home over the past couple of years knows pickings have been slim. But one outcome of lower rates is the possibility of new housing stock—which has been steadily rising for months now.
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. Realtor.com forecasts that housing stock will eventually climb by 14.5% annually in 2024.
“Lower rates and more for-sale inventory spell opportunities for buyers,” says Jones. “The summer is typically the busiest time of year in housing, but this fall may see an extra boost from shifting housing conditions.”
Pre-approved mortgage applications will start ‘waking up’
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The best thing home shoppers can do is get pre-approved for a mortgage so they’re in a position to act on that perfect house the minute it hits the market.
“Planning ahead and getting one’s buying power firmed up early will give a potential homebuyer a leg up on those that are just thinking of preparing themselves,” says Tan Tunador, a vice president and senior loan officer for Atlantic Coast Mortgage.
“A young couple reached out last week asking what they needed to do to get pre-approved, and when I looked them up, their initial application was October 2021. But when they had applied in 2021, they quickly gave up due to rates and the low inventory,” says Tunador. “Recent positive news about mortgages brought them back into the market, and they were happy that we could use their original application.”
Tunador helped them freshen up their original application with a new credit report and updated income and asset documents. Now, they’re ready to go with a new pre-approval letter.
Note: How fast a buyer needs to act all comes down to location.
“Still-competitive Midwest and Northeast markets may require swift action, while markets such as Austin, TX, that are flush with inventory may allow more time for deliberation,” says Jones. “It is important to keep a pulse on the market to ensure you can submit a competitive offer and take advantage of falling rates.”
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.”
In other words, homebuyers will find themselves essentially trading the frustration of having a higher mortgage rate for the frustration of competing in a more challenging market.
Potential buyers might once again be forced to consider risky moves like waiving a home inspection, adding an appraisal guarantee, and/or overbidding significantly to win a bid.
If you see a home you love, don’t wait
“The key is to act strategically in this evolving market,” says Cassandra Happe, an analyst for WalletHub. “Buyers should consider locking in deals at potentially lower prices now.”
“With the inventory of homes for sale still relatively low, finding the right home might still be the biggest challenge,” says Hale. “For that reason, if a shopper finds a home that fits their needs and is in budget, then it makes sense to move forward.”
Kimberly Dawn Neumann contributed to this report.
