Experts: The Real Estate Market Changes When Mortgage Rates Drop
The high mortgage rates that have paralyzed America’s housing market are falling—and could nosedive further by the end of the year.
Rates for a 30-year fixed mortgage plunged to 6.47%—the lowest in over a year—for the week ending Aug. 8, according to Freddie Mac.
And with inflation losing steam and the economy cooling, expectations are high that the Federal Reserve could make not just one, but two rate cuts by the end of this year.
As a result, Realtor.com® senior economist Ralph McLaughlin expects mortgage rates to drop further in September and December, which is “encouraging news for potential homebuyers who have been waiting to participate in the market.”
This is also encouraging news for homeowners who might be thinking of selling. Is it time to finally list their property on the market? And if they do, what should they expect?
To help shed some light on what’s coming down the pike for home sellers, here’s what real estate experts predict will happen to the housing market once rates take the plunge.
The ‘lock-in effect’ will ease—and homeowners will start selling
A recent Realtor.com analysis found that 86% of homeowners have mortgage rates below 6%. Understandably, many feel “locked in,” unwilling to trade in their low rate for today’s higher ones if they sell and buy again.
“Home sellers have been sitting on the sidelines, not wanting to give up their COVID-era interest rates,” says Tan Tunador, vice president and senior loan officer with Atlantic Coast Mortgage.
But once rates drop further, that could change.
“The faster rates drop, the less homeowners will be held in place and we could see both new inventory and more sales,” says Danielle Hale, chief economist of Realtor.com.
“There are a significant number of sellers that couldn’t stomach—right or wrong—going from a 4% rate to a 7.5% rate,” says Mason Whitehead, a Dallas-based branch manager for Churchill Mortgage. “But they can stomach going from 4% to something in the 5% to 6% range.”
More homebuyers will enter the market
In the same vein that sellers have felt frozen in place, buyers have felt iced out of the market. But if mortgage rates continue to decline, then experts predict more buyers who’ve been on the sidelines finally jump into the market.
“When rates drop, I think you will see pent-up demand hit the market again,” says Whitehead.
Some buyers, like sellers, shelved their house hunt because they felt the payment was too high, but a lower rate makes home shopping more affordable.
“For some that didn’t qualify at 7.5%, they will qualify at 6%,” says Whitehead. “So you have more people able to buy as well.”
In other words, once rates fall, the market will see both more sellers willing to sell, and buyers willing and able to buy.
Sales will come on fast and strong
Any seller thinking of listing would be wise to start prepping right now.
“Mortgage rates have been improving, and they are bringing potential buyers out early, many of whom gave up on buying, either because of the low housing inventory or the higher rate environment the past few years,” says Tunador. “For sellers, listing their house early may give them the opportunity to sell before their competition hits the market.”
Other experts agree: There are definitely signs homebuying activity is beginning to bounce off the mat.
“Mortgage applications have perked up, and refinancing activity also looks to be picking up as rates go lower and owners carrying elevated mortgage rates seek to reduce their monthly payments,” says Charlie Dougherty, director and senior economist at Wells Fargo.
“All told, mortgage applications remain low, but the recent upturn is a promising sign that buying activity is starting to heat up and defrost a housing market frozen by higher interest rates,” adds Dougherty.
And if mortgage rates continue to shift south, things might get even toastier.
“When mortgage rates [stay in] a sub-6.5% average, we will really see the housing inventory increase and sales activity boom,” says Tunador.
Home prices will likely remain steady
The good news for sellers is that even as the market gets moving, home prices are expected to remain high, or dip only slightly.
“Sellers will continue to be in a historically strong position, as the U.S. housing market is still short millions of homes,” says Dan Hnatkovskyy, co-founder and CEO of NewHomesMate. “Assuming there isn’t a severe recession, we will likely see only modest price decreases in most markets in 2024.”
However, Hnatkovskyy says that formerly hot markets like Denver, Austin, TX, and Phoenix may see a more significant drop in housing prices as smaller investor money sits on the sidelines for most of 2024. But in general, experts don’t see home prices taking a major dive as interest rates start to descend.
Even so, it will be smart for sellers not to get too cocky with their home pricing.
“Sellers may benefit from realistic pricing and encouraging buyer competition,” says Cassandra Happe, an analyst for WalletHub. “Working with a real estate agent to price strategically and enhancing online presence with 3D tours can maximize the chances of a quick and profitable sale.”
In other words, sellers shouldn’t set their hopes price too high lest they price themselves out of the market.
“Housing affordability will likely remain strained given still-high mortgage rates and the rapid run-up in home prices over the past three years,” says Dougherty. A shaky economy could “keep the pace of home sales relatively tepid.”
Multiple offers may make a comeback
The increase in competition among buyers might mean that sellers once again find themselves in the enviable position of being able to choose from several offers for their homes.
“Sellers will be in luck when mortgage rates start to drop: They’ll have multiple offers to consider and have some extra leverage when negotiating,” predicts Bryson Taggart, senior agent partnership manager for Opendoor. “For example, sellers receiving multiple offers can drive up the price of their home or waive contingencies for an easier close and a more convenient timeline.”
Still, sellers need to remember that the highest offer isn’t always the best offer.
“I advise sellers to evaluate offer terms holistically and select the one that aligns best with their wants and needs,” says Taggart. For some, that could be an offer from a more qualified buyer or a cash buyer, which provides less of a risk for fall-throughs. If a seller is planning to also purchase a home, they should pick a buyer with favorable terms for an efficient close.