Mortgage Rates Are Down, but Home Sales Are Flat. Here's Why

Between October and November of 2023, there was no change in the amount of pending home sales in the U.S., according to the National Association of Realtors (NAR).

Home affordability was recently at a near four-decade low, so the lack of change may not seem surprising.

But the lack of home buying coincided with a significant drop in mortgage interest rates. In mid-October, interest rates were near 8% and then tumbled to 7.25% at the end of November.

Buyers, in general, shrugged their shoulders at the change. But why?

Because home prices are still too high and there aren't enough compelling homes to convince buyers to contact a lender and take out a mortgage.

Why interest rates are down slightly

After more than one year of the Federal Reserve aggressively hiking interest rates, the Fed signaled recently that it may be finished.

The Fed is waiting to analyze the effect of its previous rate hikes before it makes another move. Data from November showed that inflation is cooling, though December's data indicated that some prices, including housing, rose.

Still, the pause on rate hikes have caused mortgage interest rates to slide lower, offering potential home buyers some relief.

But instead of flooding back into the market in November, buyers continued to mostly sit on the sidelines. And I don't blame them.

Home buyers aren't enticed quite yet

Buyers could be waiting for the Fed to cut interest rates. The central bank has indicated that three rate cuts could come later this year.

Waiting on the sidelines seems like a pretty good strategy right now.

Home prices have jumped nearly 28% over the past three years and Redfin predicts they could fall 1% this year. After such a huge jump, there's no harm in waiting to see if they come back down to earth.

And if the Fed cuts rates, it could go a long way in making housing more affordable again. The monthly payment -- including interest, insurance, taxes, and HOA fees -- for a $350,000 home with a 7.5% interest rate is $2,528 assuming a 20% down payment.

If that same loan has a 6.5% interest rate, the monthly cost drops to $2,340. And a rate of 5.5% brings the monthly mortgage payment down to $2,159.

When home prices began rising rapidly during the pandemic, it was hard for buyers to find a home. But when interest rates started soaring on top of the astronomical home prices, it completely demolished housing affordability.

More homes and potentially lower rates this year

Patient buyers could end up seeing a much better housing market later this year. If the Fed trims interest rates later in 2024, mortgage rates will likely fall along with them.

And Zillow said recently that homeowners who currently have low-interest mortgages may be more willing to list their homes this year. Some owners who need to move or regret their purchase will realize that ultra-low interest rates aren't coming back and put their homes up for sale.

So, if you're waiting to buy a home like me. Being patient just a little while longer could pay off. More homes could reach the market and lower rates might be around the corner. Fingers crossed.