Why Lower Mortgage Rates May Not Make Buying a Home More Affordable

There’s no shortage of people who want lower mortgage rates as the housing market grinds to a halt under the pressure of high rates and prices. But it’s not clear that lower mortgage rates will actually lower home prices.

Rates have hovered above 6.5% for the better part of the last three years, higher than they’ve been since the 2008 housing crisis, making conditions unaffordable for many prospective buyers.

“There are many buyers who are waiting on the sidelines due to affordability concerns that may rush back into the market once rates fall,” said Ben Ayers, senior economist at Nationwide. “There are also many potential sellers who are ready to move, maybe to downsize or to change locations, but are waiting for mortgage rates to move closer to what they are currently paying.”

High Mortgage Rates Pressure The Housing Market

Elevated mortgage rates not only make monthly payments more expensive, they also undercut the supply of homes for sale.

That’s because most owners have an interest rate that is much lower than those being offered currently, leaving them feeling “locked in” to their existing mortgages. And when fewer homeowners list their homes, buyers bid up prices for available homes, putting more pressure on affordability.

While lower rates could prompt more people to list their homes and boost supply, lower rates might also bring in more buyers, who would increase demand and bid up home prices, some economists said.

Lower Rates Would Boost Activity for Both Buyers and Sellers

It’s not clear to economists and industry officials whether lower rates will affect supply or demand first. A lot depends on how low mortgage rates go and how quickly that happens. 

Lower rates most likely will impact demand first, especially if they move below 6%, said Heather Long, chief economist at Navy Federal Credit Union. That would likely flood the market with buyers, potentially increasing annual home sales by 1 million from their current 30-year lows of around 4 million, she said.

“This is especially likely since millennials are at prime homebuying and family-building age. They have largely sat on the sidelines since mid-2022, so there’s pent-up demand ready to go on top of the normal demand that’s expected each year,” Long said.

However, if mortgage rates drop to around 5% to 5.5% in 2026 and 2027, Ayers said that would likely be low enough to bring more sellers into the market. 

“Rates trend down, and sellers know they can move the properties, and will ‘test’ the market by listing higher. If they get the price, this starts trends in the local markets as well,” said Phil Crescenzo, Jr., vice president of the southeast division at Nation One Mortgage Corporation.

Lower borrowing costs could also help the supply side by lowering building costs, said Sal Guatieri, senior economist at BMO Capital Markets. An influx of new houses could boost supply and potentially lower prices.