Mortgage Rates Are Dropping, But Home Prices Won’t—Here’s Why

Mortgage rates have dropped to 6.2%, down from a peak of 7.79%, leading to savings for homebuyers. However, this drop has brought more buyers back into the market, increasing competition for a limited number of homes. As supply remains low, with at least a 4 million home shortfall, prices are expected to rise despite lower rates. In markets with high demand and limited supply, like New York, competition may offset affordability gains from lower rates.

While mortgage rates are predicted to fall to the high 5% range by 2025, modest home price increases are also expected. Forecasts suggest prices could rise by 3-5%, potentially adding tens of thousands of dollars to the cost of a home. For instance, Goldman Sachs predicts a 4.4% increase, and Fannie Mae anticipates 3.1%. Housing shortages will continue to vary by region, with some areas like Texas facing less shortage than places like Los Angeles.

Home Sales Growing at Fastest Rate in 2 Years

In August, new home sales surged 14.6% to 776,000, the fastest pace since February 2022, with mortgage applications for new purchases growing 4.4%. The rise is partly due to declining mortgage rates, which have dropped for six straight weeks, reaching 6.29%. According to the Mortgage Bankers Association, first-time buyers increasingly favor newly built homes despite affordability challenges and limited inventory.

Affordability remains a key issue, with the average housing payment hitting $3,500, nearly 49% of the median income for first-time buyers. Although mortgage rates are falling, home prices are still high, with the median sale price at $433,229 in August. Many potential buyers are waiting for rates to dip below 6%, which could trigger more activity and drive prices even higher.

US Housing Starts Rise to Fastest Pace Since April

US housing starts rebounded in August, increasing 9.6% to a 1.36 million annualized rate, the fastest since April, as builders adjusted to improving demand fueled by falling mortgage rates. Single-family home construction surged nearly 16%, while multifamily projects declined. Building permits, a measure of future construction, also rose 5%, signaling potential growth ahead. However, builders remain cautious due to high inventories of unsold homes, and it may take time for consistent growth in residential construction.

While falling borrowing costs are helping support home sales, the broader impact on the economy is mixed. Homebuilding contributed to growth in early 2023 but is expected to reduce third-quarter GDP by 0.3 percentage points. Regional gains were notable, especially in the South, which saw a 15.5% jump in starts after a hurricane-induced slowdown in July. However, economists expect a sustained rise in housing starts only after affordability improves and demand stabilizes.