What Will Happen When Mortgage Rates Drop?

The most common thing I hear from homeowners right now:

“To be honest, we’d love to sell, but it doesn’t make sense because we have an interest rate of X%”

It’s no surprise—so many people are enjoying those low, fixed-rate monthly mortgage payments! In fact, the Federal Housing Finance Agency’s National Mortgage Database tells us that 84% of homeowners in California are locked in with a mortgage rate at or below 5%.

So, what happens when rates start to drop?

It’s likely that more homeowners will consider selling as the gap between their current mortgage rate and the new rates narrows. You might think this means we’ll see a flood of homes hitting the market, leading to an oversupply.

But there’s a catch.

When rates drop, buyers’ purchasing power gets a serious boost. Lower rates mean buyers can afford more home for their money. Here’s a breakdown of how the math works:

• Last October, with rates at 8%, a buyer looking at a $5,000 monthly principal and interest payment with 20% down could afford an $851,250 home.

• Today, with rates around 7%, that same payment can get them a $940,000 home.

• If rates drop to 6%, they could afford a $1,042,500 home!

As rates fall, it’s going to open up a floodgate of demand. There are so many potential buyers out there who have been waiting on the sidelines because of affordability constraints. But here’s the thing: even with more sellers, the surge in demand will likely outpace the increase in inventory. Many homeowners will still choose to stay put and enjoy their low fixed rates.

In short

While we may see more homes coming onto the market, the demand from buyers is going to be even stronger. If you’re thinking about making a move, now might be the perfect time to start planning.

Need advice or just want to chat about your options? Give me a call—I’m here to help!

-Stu