An African American couple look at financial options on their laptop

Report: Lower mortgage rates key to improving affordability 

An NAR/ study on the effects of rate reductions and price cuts found that a 1% mortgage rate decline could put a noticeable dent in monthly payments.

May 17, 2024
3 minutes

Key points:

  • If rates dropped 1%, buyers could save hundreds on monthly mortgage payments.
  • Home prices would need to fall 10% to offer the same advantage, and that has only happened once, during the Great Recession.
  • Even if rates fall, affordability will remain a challenge for households earning less than $50,000.

A new report co-authored by economists at the National Association of Realtors and suggests that declining mortgage rates could "swiftly improve" affordability for homebuyers earning at least $75,000 per year.

The 16-page report was released at a time when mortgage rates eased slightly following softer-than-expected inflation numbers. However, the Federal Reserve is expected to maintain its benchmark interest rate of 5.25% to 5.5% during its June meeting, which means there could be more storms ahead for homebuyers, especially as low supply keeps home prices elevated.

"Data suggests that between these two factors — home prices and mortgage rates — decreasing mortgage rates can more swiftly improve the affordability of homes compared to lowering house prices," the report concludes.

Improving housing affordability has proved to be difficult in recent years. Mortgage rates have doubled since 2019, and home prices keep rising despite an overall slowdown in the market, with price growth last year exceeding historical norms. Buyers are now paying nearly twice as much for a down payment as they were just four years ago, and the median monthly mortgage payment hit a record high earlier this month.

The effects of lower rates on affordability

Reducing mortgage rates by just 1% could reduce a homeowner's monthly mortgage expense by about $226. That's based on a 10% down payment on a median-priced, $384,500 home, according to the report. Over the course of a year, that savings amounts to roughly $2,700.

Lower mortgage rates could also give many homebuyers access to more listings, the report continued. For instance, homebuyers earning $100,000 would have about $20,000 more purchasing power with a lower interest rate.

Just 37% of those earners can afford to buy a home today compared to 62% who could have bought a home in 2019, according to the report. The authors noted, however, that middle- and upper-middle-income households would see the greatest affordability advantage from a rate cut, while low-income households will continue to struggle given the economics of the current market.

Price declines a less likely solution

With mortgage rates seemingly stuck in the 6-7% range, could lower home prices offer the same relief?

Yes — but prices would have to drop 10% for homebuyers to achieve the same monthly mortgage payment.

Given the trajectory of home prices, that seems unlikely, especially given that "declines in home price growth to such levels have only been observed following the Great Recession — during 2009," the report noted.

A rate reduction hack

Agents may not be able to convince the Fed to take action on rates, but they can potentially save buyer clients money by keeping an eye out for assumable mortgages, argued Howard Hanna | Rand Realty Manager J. Philip Faranda in a recent column for Real Estate News.

Faranda says assumable mortgages offer several advantages. Potential buyers may not need large down payments because of their loan-to-value ratio, and buyers may be able to get a mortgage that is well-below the market average. For homeowners, it makes their home more attractive to buyers.

"Savvy agents will get good at mortgage assumptions," Faranda wrote. "That's more than advice; it is a prediction I'm confident will manifest before your very eyes. And their clients will thank them for it."

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