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Since the beginning of the pandemic, potential home buyers have faced unprecedented challenges in navigating the US real estate market. During the height of COVID-19, mortgage rates repeatedly hit record lows but house prices rose due to low supply and high demand. Then, in the post-pandemic era, home inventory remains tight and prices remain high, but the situation is getting tougher for eager buyers as mortgage rates rise to their highest levels since 2000.
Fortunately, buyers have seen some long-awaited good news recently, as mortgage rates have finally started to fall in anticipation of the Federal Reserve cutting benchmark interest rates. September rates has fallen more than a full point since the peak and, while rates have a way to go before down below 6%at mortgage interest rate forecast for the fall looks promising.
Unfortunately for would-be eager buyers prepare a rate cutreduce the cost of borrowing no entire good news. A further rate reduction is possible buying a house is complicated in an important way, including the negative affect house prices fall. Buyers considering jumping into the market as mortgage rates fall should also be aware of how rate reductions can affect the competition they face.
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Lower rates could lead to increased demand – and higher prices
Buyers expect that to come cut mortgage rates will increase housing affordability can be an unpleasant surprise. The rate reduction may be followed quickly rising house prices that offsets most or all of the savings from lower borrowing costs.
“Homebuyer competition will increase 1,000% when mortgage interest rates are cut,” said Sean Adu-Gyamfi, a real estate broker with Coldwell Banker Warburg. “Besides the fact that lower rates mean more affordability for most people, there is a very real sense of FOMO from buyers when they don’t buy in late 2020 into 2021.”
Those with ambitions who missed the window during the record low rates in the pandemic era may not be willing to delay any longer as rates begin to drop for fear of losing the boat twice. However, they may want to jump into the market with both feet, even if it means getting into a bidding war.
“If potential buyers wait for interest rates to be cut before entering the market, they should expect greater competition because other potential buyers are in the same position, waiting on the sidelines.” agent Steven Gottlieb of Coldwell Banker Warburg said.
Unfortunately, if demand increases but supply doesn’t increase as fast as possible, this will put significant upward pressure on house prices – adding to the problems that have been in the market now and since the pandemic.
The August Housing Market Update prepared by the US Department of Housing and Urban Development suggests that, unfortunately, supply problems may persist as we start with few homes even as new buyers prepare to flood in.
The HUD report shows that the construction of new homes fell 14.8% year-over-year in July 2024. And, while the inventory of existing homes in July rose 19.8% year-over-year, there is still only 4- months of supply. The National Association of Realtors says a six-month supply is needed for moderate price appreciation, with lower rates leading to faster price increases.
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Lower mortgage rates could lead to more inventory
The good news is that it can lower mortgage rates won’t just make more potential homebuyers. It may cause inventory to increase significantly from the current baseline. If this prediction pans out, it means home prices won’t rise as fast as some fear – or even rise as much.
“Right now, we have a lot of low-rate homeowners locked out because of the pandemic,” said Beverly Hankinson, senior vice president and manager of mortgage advisory at Frost Bank. “Many people are already on the edge of the housing market, but lower rates could be the incentive they want to add to their space or move closer to work or school.”
In other words, rate cuts can finally be done on purpose seller who did not want to go because doing so means giving up the current rate is low. When the cost of borrowing drops and these would-be sellers won’t face the prospect of rates nearly doubling if they move, the dam can eliminate new listings.
“We’ve seen an increase in the supply of homes on the market and lower rates could help continue that trend, which will be good news for buyers despite increased competition,” Hankinson said.
Since studies show about 71% of potential buyers have been waiting for the rate drop to act, the end of the potential price increase will depend on whether more buyers or more sellers are motivated to make a move due to the rate drop. Unfortunately, this can be difficult for buyers to predict.
“Finding the right time to buy is not a science,” says Hankinson.
Bottom line
Homeowners who are frustrated with this uncertainty can and should be proactive about managing their finances. This will ensure that they are ready to buy when the right property is at the right price. These steps can include:
- Set a purchase budget
- Looking for a mortgage pre-approval to understand the costs and limits of the loan
- Start looking at homes on the local market to understand the options available.
“The time to buy is always when you are financially & emotionally ready,” says Adu-Gyamfi.
If you have a down payment and are approved for a home equity loan, you can choose to act now and pay it back later if rates drop again. Alternatively, you can wait until the rate cut happens and be ready with a competitive offer accompanied by proof of financing. This will allow you to get accepted offers, even in a more competitive market.
Either approach will hopefully allow you to own a home you love with no regrets — as long as you make the financially smart choice to avoid buying more home than you can comfortably afford.
