Will Falling Interest Rates Push Up Home Prices Even Further?

Like any free market, the housing market is affected by supply and demand. When demand outstrips supply, housing prices increase. When supply is greater than demand, prices fall.

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After booming during the pandemic, house prices slowed their rapid growth as interest rates peaked in 2023 and 2024, driving down demand as monthly mortgage payments — and median home prices — reached all-time highs. But as the Fed has indicated its intentions to cut interest rates in September 2024 for the first time since 2020, the cost of the average monthly mortgage payment may be set to decline.

If rates fall substantially, that might be a catalyst for further home price increases. But with prices already at an all-time high, and unaffordability at record levels, is there really room for another price surge? Here’s a look at all of the variables that could play a role .

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Why Prices May Still Increase

In a vacuum, with no other factors playing a part, a decrease in interest rates would generally spur buying activity in the housing market. Barring a huge increase in the supply of new homes, this increased demand would traditionally push up home prices.

And this traditional dynamic may well hold true again later in 2024 and into 2025. According to Zillow, as of 2022, the demand for houses in the U.S. outpaced supply by a whopping 4.5 million homes.

If demand increases in conjunction with falling interest rates, this deficit is likely to continue, or perhaps even widen, further pushing home prices upwards.

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What May Keep a Lid on a Surge in Home Buying

Although a drop in mortgage rates will theoretically improve affordability, if it coincides with a rise in prices, that advantage will be negated. According to Redfin, even though mortgage rates have already started to fall from their peaks, as of August 25, pending home sales fell 6.9%, the biggest annual decline in nearly a year.

The Redfin report said that potential buyers are in a “wait-and-see” mode as they sort out variables such as the results of the Nov. presidential election and the ramifications of the new NAR settlement, which affects how real estate commissions are paid.

The report also listed other factors influencing would-be buyers, including the already high prices of homes and the fact that lower mortgage rates will likely be available to those who can wait a few months.

If buyers continue to bide their time, as Redfin suggests they might, then home prices may fall, as there won’t be the demand to continue pushing up prices.

What Should You Do If You’re Planning on Buying?

Buying a home is not just an extremely personal decision, it also involves a lot of different variables. Which ones you prioritize are what matters most in your home-buying decision.

For example, if you’ve had your eyes on your dream home and it finally went on the market, you might want to take the plunge and buy it when you can. Even if rates are still fairly high now, you may be able to refinance in the near future to lower your costs.

On the other hand, if your primary concern is the affordability of your home, you might want to wait until interest rates fall a bit. If Redin’s prediction comes true, you may still have a window during which home prices remain stagnant or even fall a bit while interest rates drop.

The Bottom Line

Although it seems clear that mortgage interest rates are about to dip, no one can predict with any certainty how far they will fall. The same is true with the direction of home prices.

Theoretically, lower interest rates should spur additional demand, and with the current housing shortage in America keeping supply limited, prices should continue to rise. But if buyers remain in “wait-and-see” mode — or if the economy slips into a recession — prices could fall.

This article originally appeared on GOBankingRates.com : Will Falling Interest Rates Push Up Home Prices Even Further?