Interest rates have controlled much of the narrative in the real estate market over the last several years. We saw historically low rates in 2021, igniting a frenzy of activity that ate up much of our housing inventory. Then as rates continued to climb in the following years, demand cooled off and helped inventory rise back to the more balanced levels we’re seeing today.
But for those who missed out on 2-3% mortgage rates, it’s been a waiting game ever since. Of course, our Colorado markets have maintained a healthy amount of demand over supply, but many would-be buyers and sellers have been waiting for rates to take a significant drop from the 7% range we’ve seen in the last twelve months.
Well, there’s a chance that the wait could finally be over in the near future. We recently saw the average on a 30-year fixed rate mortgage fall to the 6.5% range largely based on the news that the Fed plans to cut rates in September. All signs are indicating that we will indeed see a rate cut this month, but the current debate is whether the Fed will cut by 25 or 50 basis points. Either scenario would obviously yield positive results for mortgage rates.
But again, interest rates control much of the narrative in real estate. They affect inventory, the overall pace of the market, and of course, housing prices. While many have waited on the sidelines for lower rates, housing prices have continued to appreciate. As of January of 2024, the median sale price on a single family home in the Denver Metro was about $630,000. Last month, that number came in at $660,000.
And if rates fall to the 6% range, how will that affect housing prices, inventory, and overall competition among consumers? Is it worth continuing to wait on lower mortgage rates?
Let’s say your budget for your next home is $800,000. If you bought that home today with 5% down and a 6.5% mortgage rate, your monthly payments would shake out to around $4,800. Now let’s say rates fall to 6% by the end of the month. We know that lower rates yield higher demand from buyers, creating more competitive multiple offer scenarios, and sellers know that too. So by the end of the month, that same home could be listed for $815,000. You still put 5% down, and now with that 6% mortgage rate, your monthly payments would shake out to around $4,650 - a $150 difference.
Even with a $15,000 higher purchase price, you’d be saving $1,800 a year on your mortgage payment by waiting for a lower rate. But in this example, you didn’t have to compete for that winning offer. If rates come down, it’s more likely that you’ll run into a multiple offer scenario, which means you might have to go in over asking price to get that winning offer. Once the price reaches $840,000 - keeping your 5% down payment and 6% mortgage rate - your monthly payments would be virtually the same as if you bought for $800,000 at 6.5%.
While rates certainly dictate the market, don’t forget about inventory and competition. As we discussed last month, there’s a lot more inventory on the market right now, and much less competition. If you’re in a position to buy, you’ll likely have an easier time finding a home you love right now. Not only that, but you may even be able to negotiate concessions from the seller, and then you can always refinance if and when rates do drop.
If rates fall and competition increases, you may be looking at a smaller pool of homes that fit your criteria, and decrease your chances for negotiation with sellers. As always, the market conditions alone should not be the deciding factor on when it’s the right time to buy or sell. Talk to your trusted realtor and lender to stay informed, and make that decision when it makes sense for you and your family.
