Prediction: Buying a Home Won't Be Any Easier After Mortgage Rates Drop

The Federal Reserve Board met last week and they declared that the federal funds rate would be lowered by a whopping 0.50%, which surprised a good number of people. Although mortgage interest rates aren't tied directly to the federal funds rate, they are influenced by them, and rates have been dropping pretty steadily since rumors of a fed rate cut started.

For the week ending Sept. 19, 2024, the average 30-year fixed-rate mortgage was sitting at 6.09%, according to the Federal Reserve Bank of St. Louis, down 1.7% from the height of 7.79% almost a year ago on Oct. 26, 2023.

Despite this drop in rates, and the big cut at the federal level, buying a home likely isn't going to get any easier this year.

The root cause of high housing prices

There's a lot of finger-pointing and arguing about what's really causing the housing market to stay so hot, but it's not really that hard to understand. There simply aren't enough houses in most areas -- regardless of the specific "why."

According to the National Association of Realtors, August 2024 had the highest amount of existing home inventory in over a year, at 3.9 months, and the market still isn't giving.

The National Association of Home Builders currently estimates that there's a 1.5 million unit housing shortage, though Freddie Mac argues that's a "dramatic underestimation." In 2020, Freddie Mac had estimated a 3.8 million unit shortfall, and the National Association of Realtors estimated a 7.2 million unit shortfall in 2023. These numbers are all very different due to differences in methodologies, but these major organizations share one thing in common: they are all certain there aren't enough houses to go around.

This isn't time to call for the heads of baby boomers, because it's not their fault either. If they sell their homes, where will they go? They'll probably buy another house, which means that transaction is a wash -- and it actually adds competition to the market.

The construction industry has been in trouble since the Great Recession, when a large number of builders went under or left the market entirely to preserve what was left of their capital. A lot of them never came back, and that's evident in the 2023 construction numbers.

Only about 950,000 single-family homes were built in 2023, which hardly kept up with the 1.7 million new households that formed that year. Over the last 10 years, 17.2 million new households have formed, but only 10 million single-family homes were built.

Housing competition and affordability post-Fed announcement

According to the NAHB/Wells Fargo Cost of Housing Index, in Q2 2024, housing affordability was tough. In 103 of the 176 markets it follows, typical families were "cost-burdened," defined as requiring between 31% and 50% of income to pay for a median-priced home, or worse.

On top of housing already being expensive in Q2, the Mortgage Bankers Association is reporting that mortgage applications have increased 14.2% for the week ending Sept. 13, 2024 -- the week before the Federal Reserve meeting. That means more people are thinking about buying those same houses that are already in short supply, and they're going to be qualified because they've already talked to their mortgage lenders.

While there's a good chance that home prices have kind of capped out for now, houses are still priced sky high, and the competition is already fierce. It's not what it was in August 2023, when NAR was reporting that their most recent sale averaged 3.2 offers, but receiving 2.7 offers in July 2024 and 2.4 offers in August 2024 is still indicative of a really hot market, especially as so many people are dropping out of the market due to school starting up again.

There's a 0% chance that a lower mortgage rate is going to ease any of this pressure -- and even going into the slow season isn't really going to slow anything down.

Some tips to ease the pain of a home purchase this year

It's tough out there, and it's only going to get worse, but you can make your home search a little easier with these tips.

• Widen your search area. A 10-minute commute is great, but the competition is worse the closer to a city center you get. Look for properties further out. You may find it's a bit easier to get into a home there.
• Look for a home that will do. Right now, just buying a home in some metros is a huge deal -- you may not get everything on your wishlist. A starter home is just that, a place to start. Buy a home that you can be happy in, and that is in an area of growth, and when you sell later, you can use it to springboard to your dream home.
• Consider homes that need a little work. Anybody can learn to paint or hire a guy to redo the flooring, but many people won't consider homes with these minor issues. Even time capsule homes sometimes get a lot of undeserved shade when they contain quality materials that are simply out of fashion (and will certainly come back around).

The market isn't going to be a piece of cake to navigate, but if you go in knowing why you're buying and prepared for the long haul, you'll come out the other end a homeowner -- eventually.