Mortgage rates are falling and home prices have leveled off - good news for buyers

Photo (c) Kali 9 - Getty Images

But industry experts say the return to an affordable market may take a while

Home prices and mortgage rates are joined at the hip. When both go up, home sales fall. That appears to be happening now with benefits for buyers.

A new report from real estate marketplace Zillow found that home prices have fallen sharply from their record highs reached earlier this year. High mortgage rates have simply made a home purchase less affordable for millions of people.

"Home prices in October remained in suspended animation as more buyers, but especially sellers, took a wait-and-see approach to market conditions," said Skylar Olsen, chief economist at Zillow. "Fewer home sales is the hallmark of a housing market lull, but right now potential sellers sensitive to losing their historically low mortgage rates have as much, if not more, of a reason to wait for a robust spring season and hope for mortgage rate relief.”

A report from Freddie Mac suggests that relief is on the way. The company, chartered by Congress to supply mortgage funds, reports the average rate on a 30-year fixed-rate mortgage fell from 7.08% last week to 6.61% this week, the largest one-week decline in 41 years.

‘Long road ahead’

“Mortgage rates tumbled this week due to incoming data that suggests inflation may have peaked,” said Sam Khater, Freddie Mac’s chief economist. “While the decline in mortgage rates is welcome news, there is still a long road ahead for the housing market.”

But the improvement in the environment for buyers is significant. The difference in monthly payments on a $300,000 mortgage is $200 a month when the mortgage rate declines by 1%.

That said, rates will need to keep falling to encourage both buyers and sellers to return to the housing market. Khater says it’s hard to tell when that might happen.

“Inflation remains elevated, the Federal Reserve is likely to keep interest rates high and consumers will continue to feel the impact,” he said.

Monthly payments are still elevated

According to Zillow, the monthly mortgage payment on the purchase of a typical house, even when putting 20% down, was $1,910 in October. That's up 77% over October 2021 and a 107% increase — nearly $1,000 — from 2019. 

And that’s just the principal and interest. Taxes and insurance are also part of the monthly payment, stretching affordability for many to the brink.

While prices should continue to fall as buyers sit on the sidelines, Zillow notes prices may not fall that fast. Home inventory levels remain tight as fewer current homeowners put their homes on the market.

Since many current owners have mortgage rates between 3% and 4% they may be reluctant to sell and purchase another home that has a mortgage rate two or three points higher.

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