Will I Be Able to Afford a House if Rates Fall?

If you've been trying to get a foot on the property ladder, you don't need me to tell you we're in a housing affordability crisis. The triple whammy of high property prices, limited inventory, and high mortgage rates have made life extremely difficult for new buyers in recent years.

The good news is that the coming months might bring some respite -- at least in terms of rates. This time last year, the 30-year fixed-rate mortgage had hit nearly 8%. Now, according to Freddie Mac, it is hovering around the 6.5% mark. And most analysts believe it will fall further.

The Fed is almost certainly going to cut the federal funds rate at its next meeting on Sept. 17 and 18. It may also continue to cut it further in November and December. The Fed does not set mortgage rates, but it does influence them. As such, would-be buyers are hopeful for a drop in mortgage rates. The big question is whether that will make homeownership more affordable.

Why is it so hard to afford to buy?

Housing affordability is multi-faceted. Mortgage rates are part of the picture, but their impact is exacerbated by record-high house prices. According to Redfin, the median price of a home hit an all-time high of $397,482 in July. JPMorgan says it hasn't been this hard to afford a property since the 1980s.

There aren't enough homes for sale. On top of this, there's a knock-on impact from the flurry in housing market activity during the pandemic. Many would-be sellers are trapped because moving would mean they'd lose the low mortgage rates they locked in a few years ago.

Inflation hasn't helped the situation, either. It is the reason the Fed has kept rates so high for so long. It also impacts construction costs. And higher living costs also impact buyers, as they have less available cash. That's another reason for optimism -- inflation seems to be coming under control.

Will falling rates fix the housing affordability crisis?

Falling rates will certainly reduce one of the pressures on home buyers. Let's say you took out a 30-year mortgage on a $400,000 property with $100,000 down. The difference between last year's mortgage of 8% and today's of 6.5% is already considerable:

• Your monthly principal and interest payment on the 8% loan would be $2,201. And you'd pay $492,466 in interest over the life of the loan.
• Your monthly principal and interest payment on the 6.5% loan would be $1,896. And you'd pay $382,633 in interest over the life of the loan.

The difficulty is that mortgage rates are only one part of the puzzle. Falling mortgage rates could translate into increased demand, which would mean even higher property prices.

Without bamboozling you with numbers, Goldman Sachs predicts that house prices will rise by 3.7% in 2025. And Fannie Mae says mortgage rates will go down to 6.3% by the third quarter of next year. That would mean the cost of that $400,000 property would rise to $415,000. In that scenario, your overall costs would be slightly higher than today's example above.

• Your monthly principal and interest payment on the 6.3% loan would be $1,950. And you'd pay $386,915 in interest over the life of the loan.

Don't try to time the housing market

Putting the hypothetical scenarios to one side, we don't know how much rates might go down. Nor do we know what impact rate changes could have on house prices and inventories. With so many unknowns, it isn't possible to pick the best time to buy. Especially if you're buying the property with a plan of living there for the foreseeable future.

Focus on the mortgage rate factors you control. These include your credit score, the size of your down payment, and loan amount. Shop around to get mortgage pre-approvals from several top mortgage lenders.

If you find a property within your price range on a mortgage that you can afford, it often makes sense to jump in and start building equity. You can always refinance if rates drop.

If you can't find an affordable property, don't give up. Use the time to improve your credit score, pay down debt, and build your down payment. That way when the right home appears on the market, you'll be ready to make your move.