Homebuyers

Why Waiting for Lower Mortgage Rates Could Backfire on Homebuyers

Homebuyers waiting for mortgage interest rates to fall may want to keep an eye on something else: How many other would-be buyers are also anticipating the descent.

The current housing market offers buyers some breathing room because there are fewer home shoppers battling it out. There is more room to negotiate, less competition, and more homes to choose from.

There were more than 1.14 million active listings nationwide in August, up 3.6% year-over-year, according to Realtor.com.

“Buyers should view this year’s trend as evidence that they are gaining leverage,” said Jake Krimmel, senior economist at Realtor.com.

But a significant drop in mortgage rates could bring more homebuyers into a market where housing stock has yet to fully recover. For those prepared to purchase, waiting for a lower rate could mean facing more competition, higher prices, and bidding wars.

More homebuyers could enter the market if rates fall

Mortgage rates affect how much homebuyers can borrow and the cost of their monthly mortgage payments. When rates fall, the monthly principal and interest payment generally decreases, assuming the loan amount and terms remain the same.

Lower rates could also encourage people waiting on the sidelines to resume their searches.

“When mortgage rates decrease, we can expect more buyers to enter the market. [This] can increase competition among buyers,” said Jason Gelios, a Realtor with Community Choice Realty in southeast Michigan. “At the same time, lower rates can give sellers more confidence to make a move, bringing more homes onto the market.”

The balance between those groups will matter. If demand grows faster than the number of homes for sale, competition could increase for desirable properties. That may result in higher prices, bidding wars, offers over the asking price, and some buyers feeling pressured to waive contingencies.

A larger decline in mortgage rates could have an even greater effect on the market, according to Tim Gaasch, vice president of account management and a real estate expert at Clever Offers in St. Louis.

“[It] creates a greater competitive environment for the current inventory of homes,” said Gaasch.

Gaasch expects greater competition to reduce the availability of seller-paid closing costs, mortgage rate buydowns, and other concessions. How much the market changes will depend partly on whether the number of homes for sale grows alongside demand.

A homebuyer entering a market with a rapidly growing housing stock may have more choices than someone shopping in an area where the number of listings is shrinking.

Today’s homebuying negotiating power has value

Slower conditions in some markets can create opportunities beyond the listing price. Sellers may be more willing to negotiate closing costs, repairs, or other concessions when they have fewer competing offers.

Homebuyers may also have more time to conduct inspections, compare financing options, and make decisions without the pressure of a bidding war.

The amount of leverage depends on the location and the demand for a property.

Move-in-ready homes at competitive price points in desirable areas may still sell for over the asking price. Meanwhile, sellers may offer better prices and respond more quickly to market conditions if there’s less demand.

That means negotiating power can vary from one city to another.

Prepare before homebuying competition picks up

Getting pre-approved for a mortgage before shopping can help homebuyers determine how much they may be able to borrow and what monthly payment fits their budget.

A pre-approval can also show sellers that a homebuyer has taken steps toward securing financing. Being prepared may become more important if falling rates bring additional competition into the market.

Homebuyers can also explore loan options that fit their finances and plans. Conventional loans are one possibility, while Federal Housing Administration (FHA) loans may offer a lower down payment and more flexible credit requirements.

Eligible military servicemembers and veterans may be able to purchase with a U.S. Department of Veterans Affairs (VA) loan, while those looking outside of big cities may want to consider a U.S. Department of Agriculture (USDA) loan. Down payment assistance programs may also help qualified homebuyers manage upfront costs.