Jora Gleason and her husband Zach Carman had been searching for a home in their Spokane, Washington hometown for months without much luck.

Properties within their budget often required significant repairs, Gleason noted. The one home they bid on was in such poor condition that it took an inspector merely 10 minutes to advise them to keep looking.

However, in July, the couple, both in their early 20s, found a house in the Garland District that they instantly fell in love with. Gleason, who is a registered nurse, explained that they were working with a lender who was closely tracking the mortgage market.

“The market took a bit of a downturn, so interest rates decreased. Our lender reached out and said, ‘Hey, I don’t think it’s going to get lower than this,’” Gleason shared. They successfully locked in a 5% fixed-rate mortgage for 30 years while rates were still at least one percentage point higher.

In the current competitive market, where starter homes are in short supply, scoring a favorable mortgage rate feels like a significant achievement. Gleason expressed, “We consider ourselves very fortunate.”

Are Mortgage Rates Likely to Fall Further?

As the Federal Reserve convenes on Wednesday, many believe it will reduce its benchmark interest rate by 25 basis points, with a possible reduction of 50 basis points also being discussed. Whether this will also help potential homebuyers like Gleason and Carman is uncertain.

Although the central bank does not directly set mortgage rates, home loan rates generally reflect trends in the broader financial market. Additionally, rates have been gradually decreasing in recent months in expectation of the Fed’s actions. The average rate for a 30-year fixed mortgage, which has been around 6.79% this year, has remained stable or dropped for the past seven weeks, according to Freddie Mac. It’s currently at its lowest level in 18 months.

Selma Hepp, chief economist at CoreLogic, a real estate data firm, anticipates that rates will gradually decline throughout 2024, making the spring of 2025 a potentially transformative period for the housing market, possibly signaling a return to a more “normal” housing climate not seen since before the COVID-19 pandemic.

“I sense a recovery in the housing market,” Hepp commented. “We are seeing less of the lock-in effect, increased inventory, and more realistic market expectations.”

The “lock-in” effect refers to many homeowners who hesitate to sell because they currently have low mortgage rates. A Redfin report from late August revealed that 86% of U.S. homeowners with a mortgage have a rate below 6%, and over half have rates below 4%, which experts believe may be challenging to match anytime soon.

Hepp believes there isn’t a specific rate threshold that will prompt homeowners to sell. “There is a strong demand for housing,” she stated, “but the lower the rates, the better.”

Implications for the Housing Market

More homeowners listing their properties would benefit the market, according to Justin Gramm, founder of Globella Buyers Realty in San Diego. In his region, homes are scarce and prices are high, making even minor changes in rates significant. “Some of my buyers have had to withdraw their offers,” Gramm stated. “Others feel disillusioned about the houses they can afford.”

However, both economists warn that the road ahead might be bumpy. The Fed typically doesn’t lower rates in a robust economy, as Blitz noted. “Generally, when rates are decreasing, it indicates a slowdown, concerns over a recession, or worries about job stability. People are reluctant to commit to purchasing a home in such uncertain conditions.”

Additionally, lower borrowing costs may benefit not just homebuyers but also current homeowners looking to buy a bigger or smaller house. According to Steven Blitz, chief U.S. economist at TS Lombard, making construction loans more accessible for builders could increase the supply of homes available in the market.

Hepp also believes there may be some fluctuations in inflation data that could affect rates.

Recent data shows that Americans are particularly sensitive to changes in mortgage rates, with applications rising consistently over the past three weeks, as reported by the Mortgage Bankers Association.

Real estate professionals like Gramm, however, acknowledge the latest developments in the housing market with a level-headed approach. “Timing the market is not advisable,” he said. “It’s crucial to buy when it feels right for you.”