Housing affordability is one of the top factors impacting market demand. Home buyers are unlikely to commit to the responsibility of homeownership if they feel they can’t afford it due to unsustainably high mortgage rates.
High mortgage rates can significantly increase monthly mortgage payments, which affect consumers' day-to-day lives more than the home price overall.
The sharp 4% rise in mortgage rates in 2022, triggered by rising inflation, created a major disparity in affordability for those shopping in a new high-interest rate market.
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Saving several percentage points on a mortgage rate has the potential to reduce the monthly payment by hundreds of dollars, which can make or break household budgets for the millions of Americans living paycheck to paycheck.
Many consumers —especially younger first-time home buyers — eagerly await mortgage rates to drop to a level they can afford. Experts note that declining mortgage rates are the key to improving affordability and spurring housing sales.
We spoke with Ryan Serhant, real estate broker, TV personality, and founder of brokerage firm SERHANT, about how mortgage rates have the power to improve the housing market outlook.
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Lower mortgage rates will attract more buyers
Mortgage rates are often the first aspect buyers assess when choosing when to buy a home. Though there is always the option to refinance a mortgage at a lower rate, the reduced purchasing power and unnecessarily high mortgage payments drive potential buyers from the market.
The Consumer Financial Protection Bureau found that buyers purchasing a $400,000 home at the 7.79% mortgage rate in October 2023 pay $1,200 more for their monthly mortgage than those who bought a home with the 2.6% mortgage rate in January 2021.
Mortgage rates are predicted to drop over the next year, though it will likely be a modest decline, approaching 6% by the end of 2025.
However, this reduction may be enough to entice hesitant buyers to return to the housing market.
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Serhant explains what lower mortgage rates could mean for buyer demand and housing affordability.
“Lower rates change the game for everybody — first-time home buyers will be able to get into a home without their parents’ support,” he explained. “We've never had a rate increase as fast as what we've had coming out of COVID. Inflation was painful for everyone, not just home prices, but across all assets and consumer good prices.”
“Rates coming down affect everyone's ability to buy more, and you create more buyers that way,” he continued.
Buyers and sellers are waiting to see how mortgage rates will react to a new presidential administration in 2025, which has continued to mute housing market growth.
Buyers are watching monthly mortgage payments
Even a 1% mortgage rate reduction can save buyers over $1,000 per year, which adds up significantly over a 15 or 30-year mortgage term.
The National Association of Home Builders found that over 100 million households cannot afford the median new home of $495,750 at a 6.5% mortgage rate, and an additional 100,000 households would be priced out if the price increased by just $1,000.
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Under such challenging conditions, the current housing market isn’t seen as buyer-friendly. However, if mortgage rates decline next year, it could improve buyer morale and motivate housing sales.
“Now we have buyers sitting on the sidelines,” Serhant said. “They're not moving or continuing to rent or staying at home because they can't afford the monthly payment.”
“You don't live in the home price — you live in that monthly payment,” he said. “If we can bring that monthly payment down, you bring more people out to the open houses and into showings. It creates a better housing market for everybody.”
During a time of heightened consumer prices, household debt, and competing obligations, buyers would welcome relief in lower mortgage payments. Whether the Fed continues cutting interest rates and if mortgage rates fall next year remains to be seen.
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