Mortgage rate waiting game means buyers gained more than $20,000 in purchasing power

To everyone waiting on mortgage rates to fall, the time has sort of come. And while they’re nowhere near the historic lows that fueled the pandemic housing boom, they have lessened in recent months. On the back of last week’s inflation reading, mortgage rates “dropped to their lowest level since March,” according to an analysis from Redfin; the daily mortgage rate was 6.85%, at the time.

With that mortgage rate, a homebuyer on a $3,000 a month budget could afford a home priced at $447,750 per Redfin’s calculation. “That buyer has gained $22,250 in purchasing power since mortgage rates hit a five-month peak in April, when they could have bought a $425,500 home with an average rate of 7.5%,” the analysis read.

The purchasing power goes even further when you consider mortgage rates reached a two-decade high in October last year, at just above 8%. Per Redfin, at a rate of 8%, with that same $3,000 max monthly payment, buyers could only afford a home valued at $409,250.

Mortgage rates continued to fall after Thursday’s reading, and the average 30-year fixed daily mortgage rate came in at 6.81% today. The more they come down, the more buyers can afford—but how much, and how fast, mortgage rates drop is still on the table. “It’s likely that mortgage rates will continue declining slightly in advance of the expected interest-rate cuts, but it’s unlikely they’ll drop below 6% before the end of the year,” the analysis said.

Still, even at a 6% mortgage rate and a $3,000 monthly allocation, buyers could afford a home worth $479,750. That’s a $32,000 leap in purchasing power from where we’re roughly at. “Even though mortgage rates are declining, sale prices are still at record highs and total housing costs are historically high,” Redfin said. “Prices are unlikely to drop meaningfully in the near future.”

Cooler inflation and the increasing possibility of an interest-rate cut pushed mortgage rates down, but for some time, inventory has been improving as the lock-in effect, which refers to homeowners refusing to sell for fear of losing their low rate, eases. “New listings of homes for sale are up 7% year over year, and the total number of homes for sale is near its highest level since late 2020,” according to Redfin. Homes are staying on the market longer, too. More supply, and lasting supply, is good for buyers because it gives them some negotiating power. But here’s the thing, falling mortgage rates can be a double-edged sword when it comes to home prices, which are already high.

“Now is a good time—at least compared to the recent past—for serious house hunters to get under contract on a home,” Redfin’s chief economist, Daryl Fairweather, said in the analysis. “The combination of declining mortgage rates, rising supply and a lot of inventory growing stale means buyers have a window where they have more purchasing power than earlier in the year and more homes to choose from.”

She continued: “But the window is likely to be short. Declining rates should bring many homebuyers back to the market soon, which means competition would tick up and home prices would increase even faster than they already are. It’s also possible rates drop further in 2025, which would make monthly costs decline more and increase competition even more. One thing is for sure: lower rates will lead to more home sales.”

Fairweather seemed to somewhat echo Redfin economics research lead, Chen Zhao, who previously said: “A drop in mortgage rates would bring both buyers and sellers back to the market, which could either accelerate price growth or pull it back depending on who comes back with more force. If sellers come back faster, prices would likely cool, but if buyers come back faster, prices would likely ramp up.”