Despite the ongoing affordability challenges in the housing market for most buyers in the United States, “this is as good as it gets,” said Orphe Divounguy, a senior economist at Zillow. This optimism comes from the market generally seeing more inventory, low buyer competition, and lower mortgage rates. This means now, with the slight improvement in the market conditions, might be the best time for those looking to enter the market.

According to a new report published by Redfin, an online real estate brokerage firm, buyers will now need to earn at least $115,000 just for them to be able to afford a typical house in the U.S. While that number may seem high, it represents a 1% decline from a year ago, a decline that is the first since 2020.

Redfin also found that the median mortgage payment has now dropped to $2,534 for the four weeks ending September 15, which is a decline of 2.7% from a year ago. This housing payment drop is the biggest decline that we’ve had in four years.

According to Daryl Fairweather, chief economist at Redfin, both declines stem from lower mortgage rates.

The Freddie Mac data, via the Federal Reserve, shows that the interest rates peaked this year at 7.22% on May 2. But, as of September 19, the average 30-year fixed rate mortgage is now down to 6.09%, a number even lower from the 6.20% just the previous week.

“The only reason mortgage payments are down is because of the rate effect,” said Fairweather.

What are the challenges that will remain?

According to Redfin’s data, the typical American household earns about 27% less than what they need to afford a home, with an average income of about $84,000 a year. Because at the end of the day, yes, there is a market drop, but home prices still remain high. The median asking price for newly listed homes for sale is $398,475, up 5.4% from a year ago.

Here’s What Buyers Can Expect Expect in the Coming Months

Mortgage rates will depend on the economic conditions.

Lower home loan rates will provide “a great opportunity for buyers who have been waiting,” Divounguy said. However, and this is the kicker, he also said that while the reduction in the mortgage rates presents a more favorable change to prospective buyers because of the Federal Reserve cutting interest rates, that does not “necessarily guarantee mortgage rates will continue to fall.” This really just shows more clarity on how complex the mortgage rate movement is, and hopefully, this will encourage buyers to consider much broader economic indicators and not just the Federal policy. At the end of the day, while the mortgage rates are influenced by the Fed’s policy, they are also tied to Treasury yields and other economic data.

“It’s almost impossible to figure out what mortgage rates are going to do from week to week or month to month,” said Jeff Ostrowski, a housing expert at Bankrate.com.

As Melissa Cohn, regional vice president of William Raveis Mortgage in New York, stated, “Mortgage rates will go by the way of the economy if the economy shows signs of weakening … rates will come down if we see the opposite, and that the economy is chugging along and employment gets stronger, it’s quite possible that rates will go up.” Emphasizing the direct correlation between economic health and interest rates. If the economy weakens, the rates are likely to drop as part of the efforts to stimulate economic activity, and on the other hand, if the economy remains strong and employment increases, the rates may rise to reflect a more robust economic environment where inflation control becomes the top priority.

There are More Homes Coming on the Market

Increased Housing Inventory

According to Orphe Divounguy, the combination of having a lower mortgage rate and a higher inventory of homes for sale has created a more favorable housing market for buyers. Just looking at the date from the end of August 2024, there were 1,350,000 homes for sale, which is an increase of 0.7% from a month prior, according to the National Association of Realtors. That inventory level is a significant 22.7% increase compared to August 2023.

More homes on the market means reduced competition among buyers, which basically gives them more options and potentially allows them to negotiate more on the prices.

Homebuilder Confidence Improvement

Homebuilder confidence in the market for newly-built single-family homes has been improving since September 2024, according to the National Association of Home Builders, or NAHB. Its survey also shows that the share of builders cutting prices in September was 32%, which is down one point, albeit a slight discount; this is the first decline since April 2024, according to NAHB.

“That tells me that some builders are probably starting to see some increase in foot traffic and that the market could get competitive again,” said Divounguy.

Price growth will depend on the level of existing home inventory, said Robert Dietz, chief economist at NAHB.

Future Price Trends and Market Competitiveness

Robert Dietz, NAHB’s chief economist, adds that “existing home inventory is expected to rise as the mortgage rate lock-in effect diminishes, placing some downward pressure on prices as well.”

This really just means that since there is a low-interest mortgage, the homeowners are currently holding off on selling. But, as the lock-in effect weakens, there will most likely be more homes that are likely to come onto the market, which could increase supply and, in turn, place downward pressure on the prices.

What all this means…

“You’re trading one difficulty for another difficulty,” Fairweather warned.

The housing market is not going to get worse in the next 12 months, said Fairweather.

If home buyers are discouraged because they haven’t found a home, they might have a better chance next year when there are more listings, Fairweather said.

The only downside to that is this may introduce new risks like heightened competition, she warned.

Summary:

Most homeowners are sitting on loans with record-low mortgage rates, creating a so-called “lock-in effect” or “golden handcuff” effect where they don’t want to sell and finance a new home at a higher rate. But if mortgage rates further decline in the next year, the number of homes for sale might grow as more and more homeowners may be motivated to sell.

The only problem with that is that most home buyers think that is the “trajectory” of the housing market. This means buyers should be prepared for increased competition as well, making it harder to secure a property despite better market conditions.

So, what would you do? Act now while conditions are slightly improved, or wait for more listings with the potential risk of facing greater competition?