Mortgage rates have experienced unpredictable ups and downs in recent years, much like a roller coaster ride. Meanwhile, housing prices have shot up rapidly, more like a rocket launcher, increasing significantly in a short span of time.

Elevated mortgage rates and fast-rising home prices have caused many would-be home buyers to delay their dream of owning a home. So far, waiting for conditions to improve has been frustrating. Waiting for better mortgage rates and lower home prices may be futile. However, recently, rates and prices have shown signs of stabilizing somewhat. Mortgage rates and home prices stabilizing at least gives home buyers a sense of what they’re dealing with and firm financial goals to shoot for.

Mortgage rates have leveled off

Throughout late spring and summer of 2024,  30-year mortgage rates fell by 1.14%. At 6.08%, they seemed on the verge of dropping below the 6% mark for the first time in two years. This fall in rates gave people a reason to hope that buying a home was becoming more affordable.

Then mortgage rates reversed course. From the start of October 2024, rates rose by 0.71% over six straight weeks. Suddenly, they were heading back to above 7% instead of falling below 6%.

However, November 2024 brought an unusually calm stretch for mortgage rates. During the month, 30-year rates alternated rising and falling weeks and changed by less than 0.10%. This doesn’t represent the return to lower rates that home buyers might hope for, but at least they remained reasonably stable.

Are home prices stabilizing?

Mortgage rates aren’t the only challenge home buyers have faced in recent years. Home prices have risen steadily over the past decade, and the pace has accelerated in recent years.

From mid-2020 to mid-2024, the average US home price rose by 48%. This, combined with the sharp rise in mortgage rates, made affording a home much more difficult than it had been just a few years earlier. Worse, with prices rising so rapidly, it seemed impossible for many buyers to save or earn enough to afford a home before prices increased again.

However, home prices have fallen in the two most recent months. The total decline is less than a quarter of one percent—hardly enough to offset the increases of recent years. However, even a pause in the rapid rise of home prices is cautiously good news.

Waiting for rate and price reductions may be in vain

In a dream scenario, would-be home buyers would love to set the calendar back a few years to when mortgage rates and home prices were a lot lower than now. However, waiting for a return of those conditions looks pretty unrealistic.

Mortgage rates fell when it looked like inflation was making steady downward progress towards the Federal Reserve’s goal of 2% a year. Recently, though, that progress has stalled. The year-over-year inflation rate increased slightly in October 2024.

Worse, there is growing concern that new tariffs will fuel inflation even further in 2025. Mortgage rates are very sensitive to inflation. It remains to be seen whether tariffs will push inflation and mortgage rates much higher, but at the very least, they seem likely to make it harder for them to fall.

Knowing what to work towards

Home buyers may not get much of a break from rising home prices or mortgage rates, but they appear to have stabilized recently. Mortgages and home prices stabilizing is helpful when trying to achieve any financial goal.

The relative stability in home prices and mortgage rates gives people a firmer idea of what it will take to afford a house. It may take a little longer at today’s levels than people had hoped. However, more stable prices and mortgage rates at least lets them know what to shoot for.

Improving your own position

Buying a home may take a little longer, but There are things you can actively do to put yourself in a better position to afford a home:

• Save toward a bigger down payment. A bigger downpayment means you need to borrow less, which can qualify you for a better mortgage rate.
• Work on your credit score. Raising your credit score is another way to qualify for a better mortgage rate. Over the length of a mortgage loan, anything you can shave off the mortgage rate can add up to a substantial amount of money.
• Know your target market. Monitor real estate prices in the areas where you’d consider buying. This will help you identify neighborhoods that represent better values and allow you to spot a true bargain when it comes along.

Get ready to be opportunistic

Building savings, improving your credit, and staying informed about the market will better position you to take advantage of opportunities when they arise. Being prepared is key because home prices and mortgage rates can change unexpectedly. It’s impossible to predict exactly where these rates and prices will go, but planning with today’s reality in mind allows you to adapt as conditions evolve. The relative stability observed in recent months offers a clearer path forward, making it easier to navigate the uncertainty.

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Federal Reserve cuts interest rates again

The Federal Reserve has announced a 0.25% cut in the federal funds interest rate. This comes on the heels of a 0.50% rate cut at the previous Fed meeting. A 0.25% cut is consistent with the Fed’s traditionally cautious approach of making a series of small rate cuts over time rather than large cuts all at once. The latest rate cut is in line with the Fed’s economic projections. Those show that the Fed expects to cut rates by another 0.25% by the end of 2024 and an additional 1% during 2025. See statement at FederalReserve.gov.

401(k) contribution limits to increase in 2025

The IRS announced that Americans can contribute more to 401(k) plans in 2025. The annual contribution limit is being raised to $23,500. That’s up $500 from the 2024 contribution limit. The contribution limit for IRAs will remain at $7,000 next year. Retirement plan contribution limits are generally adjusted to keep pace with inflation over time, but these changes do not happen every year. The income limits for the deductibility of IRA contributions by eligible people (or with eligible spouses) for employer retirement plans will also be increasing. See details at IRS.gov.

Mortgage rates rise again in November 2024

After falling steadily from the beginning of May through the end of September, 30-year mortgage rates have now risen for six straight weeks. This has pushed those rates up by 0.71% to 6.79%. 30-year rates are now 0.18% higher than when 2024 began but 0.97% lower than 12 months ago. 15-year rates have also seen a sustained rise. 15-year mortgage rates have risen over seven straight weeks by a total of 0.85%. This has brought 15-year rates up to 6.00%. See rate details at FreddieMac.com.

Mortgage applications fall sharply

Mortgage applications fell by 12% in the first week of November 2024. Most of the decline was due to weaker refinance demand. Refinancing applications dropped by 19% last week, while purchase applications fell by 7%. The decrease in mortgage demand is attributed to the recent rise in mortgage rates. Application volume has fallen for six consecutive weeks. This has brought purchase applications to their lowest level since mid-August 2024 and refinancing applications to their lowest level since May 2024. See details at MBA.org.

Home buyers holding out for lower mortgage rates

A new CNET survey found that just 4% of US adults would consider buying a home or refinancing with mortgage rates at 6%. That percentage rises to 18% if mortgage rates drop to 5%. Only mortgage rates as low as 4% would substantially boost the percentage of people considering a home purchase or refinancing worthwhile. 50% of those surveyed said they would consider buying or refinancing a home if mortgage rates were 4% or lower. That may be an unrealistic expectation, as mortgage rates of 4% or lower have historically been uncommon. See article at CNET.com.

Housing statistics demonstrate the challenges for new buyers

An annual report on home buyer characteristics showed how high prices and elevated mortgage rates have made it more challenging for new buyers to enter the market. For the year ending in June of 2024, first-time buyers made just 24% of all home purchases. That’s down from 32% in 2023 and is the lowest share of first-time buyers since the National Association of Realtors began collecting this information in 1981. An all-time high of 26% of buyers paid all cash for their homes, reflecting the unpopularity of today’s mortgage rates. Consistent with the need for more savings to buy a home, the median age of home buyers rose to a new high of 56 years in the latest report. See report details at NAR.Realtor.

FTC charges fintech platform Dave with deceptive practices

Dave, an online platform that offers customers instant cash advances, has been charged by the Federal Trade Commission with imposing fees on customers. The Dave app allegedly does not provide instant advances unless the customer pays a $3 to $25 “express fee.” This fee is not disclosed until the customer has provided Dave access to a checking account. Dave also allows customers to pay additional “tips, ” supposedly to provide meals to needy people. Only a small percentage of those tips go towards that cause. See article at PYMNTS.com.

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After a sustained drop, 30-year mortgage rates have risen for four straight weeks. Home prices also continue to rise. It seems that buyers cannot get a break.

Mortgage rates pose challenges for would-be homebuyers again

In late September 2024, it seemed that market conditions were finally cooperating for buyers. 30-year mortgage rates had fallen steadily for five months to 6.08%. That was 1.71% lower than their peak of 7.79% reached at the end of October 2023. That kind of drop in mortgage rates has a huge impact on housing affordability. 6.08% was the lowest 30-year mortgage rate since September 2022.

Seemingly, this created a window for buyers to get into the market at more affordable mortgage rates. Unfortunately, that window slammed shut quickly. In October, 30-year mortgage rates rose for four straight weeks. In total, that pushed rates 0.46% higher.

The unusual dynamic driving prices

It’s not just mortgage rates pricing many would-be buyers out of the market. The average home price in the US has had year-over-year increases for 15 months in a row. The average home price is $404,500 and rising.

What’s unusual about these rising prices is that they come when home sales volume has been falling. Normally, prices rise when the housing market is hot. Instead, prices have gone up while sales have been lackluster. The explanation for this dynamic has been that the inventory of houses available for sale has been very limited. Current homeowners with low rates on their existing mortgages have been reluctant to give up those low rates by selling.

There is hope for people who want to buy a home. Over the past year, the inventory of homes on the market has risen to the equivalent of 4.3 months’ worth of sales volume. A year ago, it was just 3.4 months’ worth. Theoretically, a greater supply should lead to lower home prices – or at least slow the steady price rise.

How much better can you expect conditions to get?

Homebuyers waiting for prices to come down before jumping into the housing market may find the the odds are stacked against them.

The S&P CoreLogic Case-Shiller US National Home Price Index is a measure of changes in housing prices dating back to the late 1980s. Of the 36 full calendar years for which returns of this index are available, home prices have declined in just seven. Five of the seven annual declines resulted from the housing crisis and the Great Recession. These conditions made it difficult for many Americans to make ends meet, let alone qualify for a mortgage.

As long as inflation remains controlled, mortgage rates could come down from their current level. However, since the long-term historical average 30-year mortgage rate of 7.72% is higher than current mortgage rates, the odds are against a return of 3% or 4% mortgages.

What homebuyers can do to improve their prospects

Rather than discourage would-be home buyers, these sobering statistics should help set realistic expectations. Since a dramatic drop in home prices or mortgage rates is unlikely, people hoping to buy a home should focus on doing things they can control to put themselves in a better financial position.

• Keep your rent as low as possible. It’s understandable that people who have been frozen out of the housing market might want to compensate by treating themselves to a nicer apartment or other rental property. However, raising housing expenses in a way that doesn’t create equity does not help build long-term wealth.
• Minimize financial commitments. Maintain as much financial flexibility as possible so you are ready to act when an opportunity to buy a home arises. This means avoiding expensive long-term financial commitments. From car loans to subscriptions, you should look to keep your monthly financial obligations low.
• Work on your credit score. While waiting for a chance to buy a home, do everything you can to get your credit record in great shape. Doing that can qualify you for a better mortgage rate, making a home more affordable.
• Save for a bigger down payment. This should be a by-product of keeping your rent and other financial obligations as low as possible. A bigger down payment reduces the amount you must borrow to buy a home. It could also qualify you for a lower mortgage rate.
• Follow local price trends. Even if you are not ready to buy a house, get in the habit of periodically scanning real estate listings. This helps you know which neighborhoods are pricey and which are more affordable. Also, knowing price trends helps you recognize a bargain.
• Do some test shopping. In addition to following real estate listings, occasionally go to open houses to see what you like and don’t like in a home. Especially if you’re buying a home with a spouse or other partner, seeing some actual properties will give you a better feel for what to look for when the time comes for you to start home shopping for real.

The current landscape may seem daunting for homebuyers, but taking proactive steps today can help you seize opportunities when they arise. By staying informed and prepared, you can navigate these challenging times and make your homeownership dreams a reality.

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Disclaimer: The article and information provided here are for informational purposes only and are not intended as a substitute for professional advice.

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Several trends in the housing market point to slower activity. Is this the break would-be home buyers have been looking for?

Previously, purchase demand had been so hot and heavy that prices soared. With that demand finally slowing down, does that mean home prices are becoming more reasonable?

Unfortunately, the supply-and-demand relationship in the housing market isn’t that simple. Bargains remain hard to come by, so buyers need to pick their spots.

Slowing demand hasn’t brought prices down

There are clear signs that the housing market has cooled off recently. However, this has yet to have a meaningful impact on housing affordability for typical homebuyers.

Signs of slowing demand

The Mortgage Bankers Association (MBA) reported that applications for home purchase loans as of the end of September were running 27% below the volume a year earlier. The slower mortgage activity mirrors the recent pattern in completed home sales. 

According to the National Association of Realtors (NAR), home sales stayed at an annual pace of over 6 million units from late 2020 through early 2022. They’ve since fallen off sharply.

After peaking at over 6.5 million per year, the pace of home sales has since fallen to just over 4 million. That’s a decline of around 38%. 

Little impact on affordability

So far, the impact of slowing demand on home prices has been less dramatic than you might think. In fact, home prices have risen in recent months despite falling volume.

Figures from the NAR show that the median price for sales of existing homes rose sharply during the pandemic, peaking at $413,800 in mid-2022. After falling for a while late last year, they’ve since rallied. The median sale price for an existing home is now less than 2% below the peak and 48% higher than at the end of 2019. In other words, the steep drop in demand has done little to cool off home prices. 

For most buyers, prices are only part of the problem. 30-year mortgage rates are now about 4.5% more than at the end of 2020. 

Mortgage rates were starting to ease late last year and early in 2023. Unfortunately, that has reversed in recent months.

30-year mortgage rates have been climbing since the end of February. They reached 7.19% in late September – their highest level in over two decades.

In short, home prices rose sharply and remain relatively close to their peak. Mortgage rates have soared and show little sign of returning to their former levels. 

Of course, most home buyers have to borrow to afford a home. So, the combination of sharply higher home values and mortgage rates leaves many typical buyers priced out of the market. 

Other supply and demand factors are keeping prices high

Though there are signs of less demand for housing this year, some other factors may be blunting the impact of that slowing demand on prices. 

In recent years, ordinary home buyers have had to compete with a flood of money from professional investors buying residential properties. NAR figures show this represents about 16% of sales – a significant incremental demand above and beyond normal home-buying activity.

Beyond this additional source of demand, there’s the fact that the supply of houses remains somewhat limited. Higher mortgage rates have made many existing homeowners reluctant to sell because that would mean effectively trading their current low-interest mortgage for one at a much higher rate if they buy a new home.

As a result, even with sales volume slowing, the supply of homes for sale remains tight. That tight supply helps keep prices elevated and recently has been pushing them even higher. 

Tighter credit standards could add an obstacle

Besides higher prices and interest rates, what else could go wrong for ordinary home buyers?

Tighter lending standards are another potential obstacle. Consumer debt levels are at an all-time high. Late payments and defaults are rising.

Understandably, those conditions make lenders wary. Many have tightened their lending standards. This year’s banking problems only add to this atmosphere of caution. 

This means loans may become more expensive and more challenging to secure for all but the most qualified buyers. 

Meeting the challenge

What is a would-be home buyer to do in this situation? It’s a challenging market, but there are some things you can do to make the best of it:

• Save up for a bigger down payment. You may benefit from waiting for mortgage rates to come down anyway. So, use the time to build a bigger down payment. This will help you qualify for a loan and lower your borrowing costs.
• Work on your credit. While waiting for the right opportunity, do what you can to improve your credit score. 
• Remember that conditions vary greatly by region. For example, sales generally have declined more in the Northeast than other regions while generally held up better in the South. That means there may be more bargains in some markets than in others.
• Keep a close eye on the market. Opportunities can come up quickly and unexpectedly. Don’t rush into anything; be prepared to strike when the right opportunity comes.

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Higher mortgage interest rates have built a brick wall between many would-be buyers and their dream homes. The hardship caused by higher rates for people trying to enter the housing market is well documented. However, the pain is also felt on the other side of the wall by anyone wishing to sell their home.

Sellers are hurt when high mortgage rates reduce the potential buyer market. In addition, homeowners looking to relocate may feel locked into their homes by the difference between their existing mortgage rate and what they may have to pay for a new home loan. 

The housing market has cooled off across the country

The National Association of Realtors (NAR) reported that existing home sales fell by 0.7% in August. That one-month decline added to a stretch of falling home sales volume.

Year-over-year, home sales in August 2023 were 15.3% slower than a year earlier. Despite the slowing volume, the median existing-home sales price is up by 3.9% from a year earlier.

Home prices may have been resilient over the past year because the supply-and-demand dynamics of the housing market haven’t changed despite the slowing sales volume.

A year ago, there were 3 months’ worth of home sales volume on the market. The number now is exactly the same.

The reason is that higher interest rates drive buyers away from the market, but they have a similar effect on sellers.

Higher mortgage rates take dollars away sellers

One way to measure how higher rates have reduced buying power is to consider how much you could borrow with a given mortgage payment. 

At the end of 2021, the average 30-year mortgage rate was 3.11%. Then, the steep and sustained rise in mortgage rates began. By the end of the third quarter of 2023, the average 30-year mortgage rate was up to 7.31%. Using a mortgage calculator from Zillow, it is possible to calculate how much you could borrow on a 30-year loan for a $2,000 monthly principal and interest payment at different interest rates.

The difference between mortgage rates of 3.11% and 7.31% is about $175,700 for a $2,000 monthly payment. This translates to $175,700 less purchasing power for the same $2,000 monthly payment from 2021 to 2023. One way to think about this is that the rise in interest rates has transferred more of each monthly payment from principal to interest.

A buyer ends up paying a total of about $720,000 over the life of the loan at both example interest rates. At the higher rate, far more of the monthly payment is used to pay off interest instead of principal. This equates to a loss of purchasing power for the buyer, and a corresponding loss of available buyers for homes on the market.

The mortgage trap that makes relocation tougher

For homeowners who want to relocate or downsize, higher interest rates make the decision to leave their current homes more costly. 

A homeowner currently paying an older mortgage may have an interest rate between 3% and 4%. Selling that home and buying a new one might involve switching to a mortgage with a rate above 7%. That may mean being unable to afford a home as valuable as the one they are currently in. 

In short, for people who would need a new mortgage to change homes, being both a seller and a buyer is not a wash. It would mean trading into a less affordable mortgage.

Will 3% mortgage rates ever return?

Since higher rates can work against buyers and sellers, should both parties delay moving until mortgage rates return to normal?

If you expect 3% mortgage rates to return, you may wait a long time. A look at mortgage history suggests that current mortgage rates are more normal than rates in the 3% to 4% range

A Credit Sesame analysis of data from mortgage finance company Freddie Mac found that over the past 50 years, 30-year mortgage rates averaged 7.74%. Today’s mortgage rates are actually below average.

Over the past 50 years 30-year mortgage rates have been below 4% only 13.91% of the time. To put it another way, 30-year rates have been below 4% for a grand total of only about 7 of the past 50 years. That means such low-interest rates are actually fairly unusual. 

In short, today’s mortgage rates are making things tougher for buyers and sellers than they were a couple of years ago. However, if history is any indication, these conditions may be here to stay.

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Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.

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