During the pandemic, plunging mortgage rates and limited inventory sent home prices skyrocketing. Then, as the Federal Reserve’s inflation-fighting efforts led to an increase in the benchmark interest rate in the post-pandemic era, mortgage costs climbed without an accompanying drop in home prices. Purchasing a property started to feel impossible for many. 

The good news is, the Federal Reserve recently cut the benchmark rate, giving homeowners renewed hope that mortgage rates would decline. Today’s mortgage rates are over a point below recent peaks, and while the rate forecast for October isn’t as favorable, some would-be buyers are coming off the sidelines anyway and finally getting ready to purchase a home. 

There’s just one problem. While potential buyers may have been dreaming of a home price drop to accompany lower rates, there’s a chance the reverse will happen. We asked some experts for their input on where prices are likely to trend now that rates have begun to decline.

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Will home prices rise with more Fed rate cuts?

Unfortunately for borrowers hoping for more affordable housing this fall, the laws of supply and demand aren’t working in their favor. 

“Builders really stopped building homes in mass in 2008,” says Aaron Gordon, branch manager and senior mortgage loan officer at Guild Mortgage. “We have tens of millions more people in the US today. That problem has been slowed by higher mortgage rates and lower demand but will rear its head again once demand increases.”

Lower rates could trigger that increase, especially as 38% of potential buyers have been waiting for rates to drop before making a purchase, according to a Realtor.com survey. When all those buyers start taking action and making offers on properties, increased competition could push prices higher as buyers fight for available homes. 

“More homebuyers have already come to the market and off the sidelines in the last few months as rates have been steadily declining,” according to Sean Adu-Gyamf, a real estate broker at Coldwell Banker Warburg. That trend is likely to accelerate. “I expect home prices will begin to rise if interest rates continue to fall,” he says.

Of course, if more sellers start listing properties in response to an increase in potential buyers, the resulting supply bump could offset price surges that often accompany a sharp rise in demand. But there’s no guarantee this will occur in the coming months and some evidence suggests it won’t happen.

“There is a shortage of new developments and current owners have recently invested more money in their homes to stay in them longer, not sell them,” Tate Kelly of Coldwell Banker Warburg says. If sellers are slow to enter the market, would-be buyers are all but certain to be looking at price surges that make properties harder to afford even at a lower rate — at least for the time being.

“Prices have leveled out in most areas over the last year, but we believe that lower mortgage rates will enable buyers to get back into the game more quickly than sellers, and that at least in the short run prices will have another run-up,” warns Jon Bodan, President & Founder of The Perpetual Financial Group, Inc. and strategic financing advisor at HouseCashin. “With increased housing demand fueled by lower rates, and with already constrained supply, we see another imbalance coming, but for how long is anyone’s guess.”

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Other considerations

While projections of future price increases are unwelcome news for those waiting to buy, the good news is prices aren’t likely to soar immediately as rates simply haven’t declined enough yet to stimulate a massive increase in buyers.

“In my opinion, in the short term, home prices will be fairly stagnant,” Gordon says. “However, once rates get below 6%, and stay there for some time, the demand for homes will increase and inventory will be absorbed once again, driving home prices up.” 

Adu-Gyamfi agrees, reporting that “there are still folks waiting for the national average of a 30-year fixed to be below 6%. If and when that happens, we expect there to be not only a rise in home prices but more bidding wars as well.”  

Realtor.com’s data supports this theory, as just 6% of Americans say they’d buy a home in the next six months if mortgage rates fall between 0.25 and 0.75 percentage points compared to 28% who are waiting for a two percentage point decrease. With average mortgage rates at 6.25% now, it could take some time before buyers are ready to act. When that 6.00% threshold is broken, however, conditions could shift. 

“Before we see prices rise, we need to see a larger buyer pool re-entering the market,” according to Kate Wollman-Mahan, an agent at Coldwell Banker Warburg. “We are in a very patient market right now where buyers have no real sense of urgency unless a property is very attractively priced. Once buyers’ confidence returns – and rates are certainly an important part of that – we can expect to see prices rise.” 

Of course, outside events should shake that confidence, with Kelly warning that “there are also other factors at play in our current market that aren’t real estate related that I think are still causing the market to remain a bit stagnant in terms of pricing and activity. Some of these factors include the conflict in the Middle East, the war in Ukraine, the upcoming elections, and, most recently, the weather disasters hitting the Southeast.”

Still, barring any major outside events, price increases are likely to result if rates do continue to drop and especially if they break the 6.00% barrier. Buyers who don’t want to get priced out may want to consider purchasing sooner rather than later at today’s current prices and then refinancing their home loans later if rates drop further.

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