Since mortgage rates peaked in the spring, homebuyers with a monthly budget of $3,000 have seen their purchasing power increase by more than $20,000.
Potential homebuyers who've been waiting for mortgage rates to start falling may want to start thinking seriously about buying a home now: Thursday's inflation report showed mortgage rates falling to their lowest level since March, and the supply of homes for sale is also increasing, creating a golden opportunity for buyers to get in before the competition heats up.
A homebuyer with a $3,000 monthly budget could purchase a $447,750 home at the current daily average mortgage rate of 6.85%. When mortgage rates hit a five-month high in April, the same buyer gained $22,250 in purchasing power while being able to purchase a $425,500 home at an average interest rate of 7.5%.
To put home affordability in another perspective, the monthly mortgage payment for a typical U.S. home (priced at about $400,000) is currently $2,647 at a 6.85% interest rate. That's down nearly $200 from $2,814 at a 7.5% interest rate.
Mortgage rates fell to their lowest in four months on Thursday after the latest Consumer Price Index report showed inflation was slowing at a faster pace than expected, raising the possibility that the Federal Reserve will cut rates by September.
Mortgage rates are likely to continue to decline slightly ahead of expected rate cuts, but are unlikely to fall below 6% by the end of the year.
While mortgage rates are falling, sales prices are still at record highs and the total cost of housing remains historically high. Prices are unlikely to fall significantly in the near future.
Another good news for buyers is that there's more choice.
Rising inventory is also encouraging for buyers: New listings of homes for sale are up 7% year over year, and the total number of homes for sale is nearing its highest level since late 2020.
One reason more homes are coming onto the market is because homeowners locked into ultra-low mortgage rates are tired of waiting for interest rates to drop dramatically before putting their homes on the market. Interest rates have been at twice pandemic-era lows for almost two years, and homeowners are coming to terms with the fact that if they wait for rates to drop to 3% or 4% before selling and moving on to their next home, they may end up waiting several years. The fact that interest rates are now slightly lower could also lure more would-be sellers off the sidelines.
Homes are also staying on the market longer than usual: Of the homes on the market in May, more than 60% had been on the market for more than 30 days without a deal, up from 50% two years ago. Two in five (40%) homes had been on the market for more than two months without a deal, up from 28% two years ago.
The rise in homes for sale and the fact that many are going unsold means that many of the less attractive homes on the market are struggling to find buyers, meaning homebuyers in some areas have the chance to get a home for less than the asking price and negotiate other savings, like help with home repairs and closing costs.
“Right now is a good time to close a deal for serious home buyers, at least compared to recent times,” says Daryl Fairweather, chief economist at Redfin. “The combination of lower mortgage rates, increased supply, and much of the inventory aging gives buyers more power and more options than they had earlier this year. But the window will be short-lived. Lower interest rates should bring many homebuyers back into the market soon, meaning more competition and home prices will soar even more than they are now. We could see even lower interest rates in 2025, which would bring monthly costs down even further and create even more competition. One thing is for sure: lower interest rates will lead to more home sales.”