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There's a popular saying in real estate: "Marry the house, date the rate." In other words, you're stuck with the home you buy, but mortgage rates are fickle — you borrow money at one rate, then someday you refinance and get a better one, shaving hundreds of dollars off your monthly payments.
But as anyone swiping on the apps will tell you, dating isn't all it's cracked up to be. That's especially true for anxious buyers who are holding out hope that high rates will soon drop. Like hopeless romantics waiting for something better to come along, these wannabe homeowners could be making a grave miscalculation.
Buyers early in the pandemic got one of the best deals in history when borrowing rates sank to record lows. Then, as the Federal Reserve began its battle against inflation in 2022, mortgage rates shot up, eventually hitting a 20-year high in October. A huge swath of homeowners don't want to give up the cushy loan terms they scored a few years ago, and potential buyers just watched their spending power plummet, so both groups are hanging out on the sidelines.
Many prospective buyers are now rooting for rates to fall again. In some ways, their logic makes sense. Everyone's talking about the "lock-in effect," or the idea that would-be sellers aren't putting their homes on the market because they have such good mortgage rates; if rates fall, then maybe more owners would be willing to make that trade-off. It would also be cheaper to borrow money for a home — the difference of even a couple of percentage points on a mortgage rate can mean paying hundreds of extra dollars every month for a loan tied to the same house.
These observers miss a crucial point, though: When rates fall, demand shoots up. Buyers flood back into the market, adding to the competition and possibly driving up prices. Over the past decade, there's been a clear correlation between mortgage rates and inventory: When mortgage rates fall, the number of available homes for sale at a given moment shrinks. And when rates go up, more homes sit on the market and inventory rises.
If borrowing rates do end up falling this year, as many predict, it could trigger bidding wars and the kind of frenzied dealmaking that defined the pandemic-era housing boom. So while it may be uncomfortable right now, there's a good chance that buyers' prospects won't be getting better anytime soon — in fact, they could get worse.
"Don't expect that lower rates are going to suddenly make it easier for you as a homebuyer," Mike Simonsen, the president of the real-estate data firm Altos Research, told me. "We can see that the demand comes back in quickly, the competition heats up. Then we're right back into the bidding wars with low inventory and all of those challenges."
Basically, it might be a better time to buy a house than you think.
For most prospective buyers, the lure of playing the waiting game comes down to basic math. Let's say you try to buy a $400,000 house with a 20% down payment and a 30-year loan. The typical rate for that mortgage sits around 6.87%, according to Freddie Mac, but maybe you have good credit and an enterprising loan officer who can get you a 6.5% rate. Even under those generous terms, you're looking at a monthly payment of roughly $2,023. Compare that to the roughly two-thirds of American homeowners who are sitting on a mortgage with a rate below 4%. Even at the top of that range, a 4% mortgage on the same house would mean monthly payments of $1,528 — a nearly $500 difference. You're not getting anything extra for that money; you're just not as lucky as someone who got a loan a few years ago. So, yes, waiting it out until mortgage rates decline sure seems appealing. The disconnect comes in thinking that things will magically get better for buyers if and when that happens.
Don't expect that lower rates are going to suddenly make it easier for you as a homebuyer.
No matter how sluggish the market gets, there are hundreds of thousands of American households looking to change their living situations at any given time for a variety of reasons: marriage, divorce, better schools, or new jobs. What matters is the balance between the number of buyers and sellers: When demand dwarfs supply, we get the pandemic housing boom. And if buyers pull back, homes sit longer or sellers drop their prices. That's why active inventory is so important: When buyers have more options, they can slow down, fully vet their choices, and maybe even haggle on the price.
Just because there's more movement, however, doesn't mean there's more active inventory. In 2021, a notoriously cutthroat year for house hunters, the number of sales reached the highest point in more than 15 years, CoreLogic found. At the same time, the number of homes on the market was hitting record lows. Even in the busy spring selling season, when you'd expect to see more than 1 million single-family homes and condos on the market at any given time, there were less than 500,000. Almost as soon as a listing hit the market, it was gone — scooped up by investors, cash-rich retirees, or first-time buyers who were either lucky, desperate, or both. This explains why many frustrated homebuyers shared a similar sentiment during the pandemic: "Everyone seems to be buying and selling homes, but it doesn't feel like there are any out there for me."
When mortgage rates start to make their way back down, a similar situation could play out. As of February, there were about 665,000 active listings across the country, according to Redfin — an increase of 13% from the year before, but well below the more than 1 million homes on the market during the same month in 2018 and 2019. And plenty of buyers are biding their time — more than 60% of potential buyers said they were willing to wait for prices or rates to fall before buying a home, a survey published last year by Bank of America found. And as rates fall, more buyers are able to make the numbers work: For every percentage-point drop in mortgage rates, another 5 million households are able to qualify for a $400,000 mortgage, according to estimates from John Burns Research and Consulting. So if you think there's going to be more housing inventory when rates fall, you're basically betting that the number of homes hitting the market would outpace all of that newly created demand.
"I just don't see that happening," Alex Thomas, a senior research analyst at JBREC, told me. "There's just too many people that have been priced out that are waiting on the sidelines. I think that would overwhelm any increase in inventory that you'd see."
The rise in borrowing rates since mid-2022 has kept as many as 1.33 million home sales from happening, according to estimates from a recent working paper published by the Federal Housing Finance Agency. But a lot of those phantom sellers would also need to turn around and buy another home, meaning they're not actually adding to active inventory. And even if typical mortgage rates fall to 6% or 5.5% — a significant drop from the prevailing rate of nearly 7% — there would still be people locked in, Will Doerner, an economist at the FHFA, told me. That effect isn't going away anytime soon.
There's just too many people that have been priced out that are waiting on the sidelines.
"You're still going to have people who are not going to move, who are not going to give up their house forever, basically," Doerner told me, referring to homeowners with mortgages below 4% or even 3%. "It's going to take a heck of a change for them to ever want to get rid of those mortgages."
The alternative presents other complications, though: If mortgage rates remain stable or even rise, buyers won't be able to afford as much house as they could have a few years ago. They're simply not getting as much bang for their buck. If they can adjust their expectations and still buy a home, though, they would trade the pain of today's higher payments for the benefits of getting on the homeownership ladder. One day, they might even break up with that mortgage rate and refinance for a better one.
"So I buy a smaller home, but I still have the opportunity to buy a home," Simonsen told me. "Whereas when it's crazy hot, I can't even buy the smaller home because there's 40 bidders."
Some caveats to consider here: Nobody, and I mean nobody, can confidently say where mortgage rates are headed next — we saw that last year when some prominent forecasters bet on the typical rate dropping to 5% by the end of the year, and instead it hit 8%. The Federal Reserve has signaled that it plans to drop borrowing rates this year, which would likely push down mortgage rates. But it's not clear when that could happen, especially since the economy is still running hotter than expected, and the Fed keeps kicking the can down the road.
The lock-in effect may be dampening the spirits of both buyers and sellers, but it's not the main culprit here. It'll work itself out as the economy (and rates) normalize, Fed chair Jerome Powell told a Senate committee earlier this month, implying that buyers and sellers will eventually accept this new reality and start to transact more. Rather than dwelling on rates, he pointed to a longer-term issue: the housing shortage. Yes, we need more people moving. But the hard, simple truth is we really just need more homes.
"People are focusing on mortgage rates because every week they hear about mortgage rates changing," Doerner of the FHFA told me. "It's sort of a quick fix of like, 'How do we change mortgage rates? They go up and down really fast.' Supply is much more difficult."
If you believe rates will drop, it doesn't mean you should go out right now and buy a house you can't afford. In fact, please don't consider any of this financial advice. But it's important to consider the trade-offs when deciding whether to buy a home. If you wait to take the plunge when rates are lower, just be prepared: You may find yourself throwing elbows with a bunch of other people who have the same idea.
James Rodriguez is a senior reporter on Business Insider's Discourse team.