The housing market is showing signs of renewed activity. For months, high interest rates have caused potential buyers to hesitate, but now things are changing. Due to various economic factors, interest rates are dropping, and yesterday, the Federal Reserve lowered the federal funds rate for the first time since March 2022. While the Fed does not directly control mortgage rates, this opens the possibility for mortgage rates to decrease further, especially with more rate cuts expected next year.
As mortgage rates drop, both buyers and sellers will naturally enter the market, increasing both demand and supply. It’s obvious that more buyers will emerge because lower interest rates boost purchasing power. But here’s something important to consider: why does supply (sellers) increase when interest rates fall? Sellers are often waiting for lower rates to sell their homes, knowing they will likely be buying again. This leads to a situation where demand outpaces supply, as both first-time buyers and those selling and buying homes enter the market.
In short, when interest rates fall, demand will increase. And when demand rises, home prices naturally go up.
The graph below shows the relationship between falling mortgage rates and rising buyer activity. The orange line tracks the average 30-year fixed mortgage rate, and the blue line represents the Mortgage Bankers Association (MBA) Mortgage Application Index, which tracks mortgage applications.
As you can see from the graph, as mortgage rates (orange) decrease, the mortgage application index (blue) increases. This indicates that more buyers are entering the market.
So, how should we interpret this?
According to the National Association of Realtors (NAR), home sales increased in July, marking a welcome change after four consecutive months of decline. If you’re looking to sell your home, this increase in buyer activity could be a big advantage. More buyers mean more competition, which could lead to higher offers and shorter time on the market. It’s still very much a seller’s market.
On the flip side, for buyers, now is the time to act quickly. As interest rates continue to drop, more buyers will enter the market, likely driving home prices up faster. Many buyers are waiting on the sidelines, hoping for even lower rates, which could intensify competition and accelerate price increases.
As I always tell my clients, home prices are rising faster than mortgage rates are falling. And remember, you can always refinance your mortgage if rates drop further.
Of course, the supply-demand ratio can vary depending on the market. However, in areas with top school districts, home prices are likely to rise faster. Before making any major real estate decisions, I highly recommend consulting with an expert to assess the supply-demand ratio in your target area and reviewing census data to anticipate how many sellers might enter the market.
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