Mortgage rates are falling from 8%, a seemingly promising sign for marginalized buyers. But further declines could lead to pent-up demand.
“If interest rates fall below 7%, I think we will have a surprisingly strong year,” Daryl Fairweather, chief economist at Redfin, told Yahoo Finance Live (video above). “Then I think we’ll see more people engaging in bidding wars.”
According to Freddie Mac, the average 30-year fixed-rate mortgage fell to 7.22% this week, and interest rates appear set to continue falling through the end of the year. Overall, interest rates have fallen by more than half a percentage point in the last five weeks.
Read more: Mortgage rates at 20-year high: Is 2023 a good time to buy a home?
That has prompted some buyers to jump back in. According to the Mortgage Bankers Association (MBA), the number of mortgage applications to purchase increased 5% in the week ending November 24 compared to the previous week.
At the same time, the average monthly mortgage payment fell by over $100 last month as interest rates fell slightly from 8%.
That means a buyer who purchases a home at last week’s average interest rate of 7.29% can expect an average monthly mortgage payment of $2,575. That’s $164 less than the all-time high of $2,739 reached a month earlier, but up 13% from a year ago, according to Redfin.
“Increasing interest rates to nearly 8% has reset the threshold for buyers wanting to get back into the market,” Fairweather said.
Read more: How to buy a house in 2023
Still, buying activity remains 20% lower than a year ago, MBA noted.
“The buying market remains depressed due to the continued low supply of existing homes in the market,” Joel Kan, MBA deputy chief economist, said in a press release.
However, for those still searching, there may be a glimmer of hope.
New listings in the four weeks leading up to Nov. 26 saw the largest year-over-year increase since 2021, according to Redfin.
Buyers can also take advantage of new listings on the market, which rose 5.8% year-over-year, according to Redfin data — the strongest increase in more than two years. The total number of new advertisements was 64,576. By comparison, new listings fell this time of year, Redfin analysts noted.
The story goes on
“There will be more people who want to move because they get a new job, get married or have children. So people’s lives go on and that creates demand,” Fairweather said. “And when we have a strong stock market, people may feel comfortable spending money, but these high interest rates are the biggest drag on the real estate market right now.”
Read more: How to get a 3% down payment in 2024
Potential home buyers leave a home for sale in a Clarksburg, Maryland neighborhood on September 3rd. (Source: Roberto Schmidt/AFP via Getty Images) (ROBERTO SCHMIDT via Getty Images)
“Limited inventory leads to bidding wars”
Although some homeowners have put their offers on the market, most are still hesitant to offer them.
According to Fannie Mae’s latest Real Estate Sentiment Index, about 37% of homeowners believe it’s a bad time to sell a home. Overall, 78% of respondents in October also said the economy was on the wrong track, up 7 percentage points from the previous month.
The problem is that rates may fall enough next year to convince buyers to come back, but not enough to convince enough homeowners to sell.
“As interest rates fall, we will see more buyers return to the market and limited inventory leads to bidding wars that drive up prices,” Fairweather said. “We are currently seeing some relief in new listings as more sellers decide now is the best time to sell, and perhaps that will continue into next year. So hopefully we have a somewhat balanced situation, also when it comes to prices.” decline.
According to Redfin, the available inventory of homes on the market as of Nov. 26 was 4.2 months. According to Redfin, at least 4 to 5 months is considered a balanced market.
Fairweather added: “But I don’t think that balance will last. The general story for the real estate market is that there are fewer homes available compared to the number of people looking to buy a home…Fact.” [rates] have fallen a bit makes me more optimistic, but I think it will be another weak year, at least if we look back historically.
Gabriella is a personal finance and housing reporter at Yahoo Finance. Follow her on Twitter @__gabriellacruz.
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