Homebuyers’ quandary: to wait or not to wait for lower mortgage rates

Shop for a home now or hold out for the possibility of lower mortgage rates? That question is confronting many home shoppers this spring homebuying season.

Lower rates give home shoppers more financial breathing room, so holding out for a more attractive rate can make a big difference, especially for first-time homebuyers who often struggle to find an affordable home.

However, there’s a potential downside to waiting. Lower rates can attract more prospective homebuyers, heating up the market and driving up prices.

Acting now would likely saddle a buyer with a rate of around 6.9% on a 30-year mortgage. In late October, the rate surged to a 23-year high of nearly 8%, according to mortgage buyer Freddie Mac. Economists generally expect the average rate on a 30-year mortgage to decline later in the year.

“If mortgage rates do in fact drop as expected, I would expect there to be more competition from increased demand, so that’s one reason to potentially act now,” said Danielle Hale, chief economist at Realtor.com. “And then those buyers, if mortgage rates do fall, would presumably have an opportunity to refinance.”

Gagan Hegde, a software engineer in Durham, North Carolina, is leaning toward the proactive approach as he looks to buy his first home.

Hegde, 29, worries that delaying his search would eventually put him up against others also looking for lower rates in a market that’s already plenty competitive.

Just recently, he matched the $450,000 list price on a townhome, but another buyer offered more than what the seller was asking.

Rather than dwell too much on mortgage rates, he’s now focusing on finding a three-bedroom, three-bath home he can afford. Once rates fall, he’ll look to refinance.

“I’m just completely being agnostic to the financing prices because I think if you start paying too much attention to it, there’s no clear answer,” he said.

The rock-bottom mortgage rates that fueled a buying frenzy in 2021 and early 2022 are long gone. While an average rate on a 30-year home loan of just under 7% is not far from the historical average, that’s little consolation to homebuyers who, prior to the last couple of years, hadn’t seen average rates this high going back nearly two decades.

Combined with a nearly 44% increase in the national median sale price of previously occupied homes between 2019 and 2023, elevated mortgage rates have made buying a home less affordable for many Americans.

A recent analysis by Redfin found that the typical U.S. household earns about $30,000 less than the $113,520 a year it needs to afford a median-priced U.S. home, which the company estimated was $412,778 in February. Redfin defines a home as affordable if the buyer spends no more than 30% of their income on their monthly housing payment. The analysis factored in a 15% down payment and the average rate on a 30-year loan in February, which was around 6.8%.

Lower mortgage rates would boost homebuyers' purchasing power. Financing a $400,000 home with a 30-year mortgage with a fixed rate at last week's average of 6.82% works out to about $215 more a month than if the rate was at 6%, for example. Monthly payments on the same loan two years ago, when the mortgage rate averaged 4.72%, would be $534 less.

Many economists expect that mortgage rates will ease this year, but not before inflation has cooled enough for the Federal Reserve to begin lowering its short-term interest rate.

The Fed has indicated it expects to cut rates this year once it sees more evidence that inflation is slowing from its current level above 3%. How the bond market reacts to the Fed’s interest rate policy, as well as other factors can influence mortgage rates. Current indications are mortgage rates will remain higher for a while longer.

For now, the uncertainty in the trajectory of mortgage rates is working in favor of home shoppers like Shelby Rogozhnikov and her husband, Anton.

The couple owns a townhome in Dallas and want more space now that they’re planning on having their first child. They’re looking for a house with at least three bedrooms that’s priced within their budget of around $300,000.

They’re not feeling any urgency, but they are eager to avoid a surge in competition should mortgage rates decline in the coming months.

“I know interest rates will go down eventually, but I feel like when they go down housing prices might go back up again,” said Shelby Rogozhnikov, 38. a dental hygienist. “I have the mortgage rate thing to worry about and my biological clock, which has less time on it than the mortgage rates, so it’s now or never.”

Real estate agents from Los Angeles to New York say bidding wars are still happening, though not as often as in recent years in some places.

“Overall, the bidding wars are not nearly as extreme as they were in markets’ past,” said Tony Spratt, an agent with Century 21 Real Estate Judge Fite Co., in the Dallas-Fort Worth area. “We’re still in a sellers’ market, but it’s much more mild than it was.”

Home shoppers also have more properties to choose from this spring than a year ago. Active listings -- a tally that encompasses all the homes on the market but excludes those pending a finalized sale -- have exceeded prior-year levels for five straight months, according to Realtor.com. They jumped nearly 24% in March from a year earlier, though they were down nearly 38% compared to March 2019.

The still-relatively tight inventory is helping give sellers the edge in many markets around the country, but not all.

In Raleigh, North Carolina, home listings are taking longer to sell, and that’s made sellers more flexible on price or with helping cover repair costs, said Jordan Hammond, a Redfin agent.

“Before we saw sellers could really do what they wanted,” she said. “They didn’t have to contribute at all to the buyer’s purchase. And now that’s kind of flipped. I’m seeing more buyers pushing sellers.”

Still, the thin inventory of properties on the market means home shoppers who can find a property for sale in their price range may want to put in an offer rather than wait, because there’s no guarantee a better option will come along right away.

Those shopping in areas where new-home construction is more prevalent may have better luck this spring.

In response to higher mortgage rates, more than one-third of builders cut home prices in 2023. Many also offered buyers incentives like mortgage rate buydowns and below market-rate financing.

Builders also stepped up construction of smaller, less expensive homes, which helps explain why the median sale price of a new U.S. home fell nearly 8% in February from a year earlier to $400,500. That’s the lowest level since June 2021.

Home shoppers and sellers who wait until summer to test the market will also have to factor in how they may be affected by proposed changes to policies around real estate agent commissions.

Last month, the National Association of Realtors agreed to make policy changes in order to settle federal lawsuits that claimed the trade association and several of the country’s biggest real estate brokerages engaged in business practices that forced homeowners to pay artificially inflated commissions when they sold their home.

The policy changes, which are set to go into effect in July, could lead to home sellers paying lower commissions for their agent’s services. Buyers, in turn, may have to shoulder more upfront costs when they hire an agent.