Mortgage rates have fallen sharply in recent weeks, improving the outlook for homebuyers previously held back by high borrowing costs.
But with the Federal Reserve expected to cut its benchmark interest rate this year, many forecasters expect mortgage rates to fall further.
This situation creates a dilemma for buyers: should they jump into a new, attractive market that promises thousands of dollars in profits, or wait for a potentially more favorable market?
Mortgage rate trends are often difficult to predict, and experts told ABC News it's a good idea for homebuyers to jump into the current market because buyers have the luxury of refinancing if rates continue to fall.
But some experts say this approach carries risks, including losing additional time to save money and the risk that home values could fall after the purchase if the market worsens.
“If you need to buy real estate, go for it,” Murthy Subramanian, a professor of finance and business at New York University, told ABC News. “Don't try to time the market.”
Last year, mortgage rates hit their highest level in more than 20 years.
But interest rates have fallen sharply in the past few months: As of last week, the average rate on a 30-year fixed mortgage was about 6.6%, according to Freddie Mac, down more than 1 percentage point from its peak in October.
Mortgage rates have fallen sharply in recent months Freddie Mac
A one percent drop in mortgage interest rates can save you thousands or tens of thousands of dollars each year, depending on the price of your home.
The decline in mortgage rates coincided with the Fed announcing it plans to cut interest rates by the equivalent of three quarter-point cuts this year.
Such a plan would reverse a near-historic series of rate hikes over the past year that have sent mortgage rates soaring.
Mortgage rates are closely tied to the 10-year Treasury yield, which last month hit its lowest level since August. These yields are highly sensitive to the Fed's interest rate movements.
“Treasury rates are falling, and as Treasury rates fall, mortgage rates will fall,” Susan Wachter, a real estate professor at the Wharton School of the University of Pennsylvania, told ABC News.
Federal Reserve Chairman Jerome Powell speaks during a press conference at the Federal Reserve Board meeting in Washington, Dec. 13, 2023. Kevin Lamarque/Reuters
While mortgage rates may continue to fall, experts said it makes sense to jump into the market because interest rates often fluctuate unexpectedly.
“I would be cautious about advising potential homebuyers to delay their purchase in hopes of better conditions in the future,” said Julia Fonseca, a professor at the Gies College of Business at the University of Illinois at Urbana-Champaign. “It's very difficult to time the market.”
Lu Liu, a professor at the Wharton School of the University of Pennsylvania, agreed.
“Households should make home-buying decisions based on their needs,” Liu told ABC News. “It's very difficult to accurately predict long-term interest rates.”
Experts further added that if interest rates fall further, homebuyers can opt to refinance their mortgages at a relatively low cost.
“Refinancing is very efficient,” Wachter said.
But some experts say this approach has some drawbacks.
When homebuyers act in a hurry, they have less time to build up savings before incurring the big expense of a mortgage.
Buyers also run the risk of purchasing a home just before a market downturn, which could cause the home's value to fall almost immediately.
“There's a risk that home prices will fall sharply,” Wachter said, noting that it would likely require a severe recession that would cause layoffs and a sharp drop in demand for housing.
But there is growing optimism about the outlook for the U.S. economy, which experts widely expect will slow but not contract over the next 12 months.
“I think the risk of a significant decline in home prices has passed,” Wachter said.
Ultimately, the home-buying decision requires an individual evaluation of factors that go far beyond borrowing costs, some experts say.
“Whether now is a good time to re-enter depends on individual circumstances,” Liu said.