What Will Happen to Home Prices if Mortgage Rates Drop?

Mortgage interest rates can have a tremendous impact on the housing market. One survey by U.S. News found four in five (80%) of potential homebuyers are waiting for mortgage rates to drop. Nearly 75% of homebuyers delayed their purchase while they waited for interest rates to improve.

The Federal Reserve, as the central bank, sets monetary policy (Fed policy) that influences mortgage rates, and recent Fed actions have kept rates in the 6-7% range.

The challenge is that interest rates might not change for a long time. They have held strong in the 6-7% range for the past few years. Freddie Mac and the Mortgage Bankers Association regularly report on today’s mortgage rates and provide forecasts, often citing their chief economists. The dream of rates plummeting back to the COVID-19 lows of 2-3% interest loans might be far off.

But what will happen to home prices if mortgage rates fall? This guide will look at the effects of lower interest rates and what could happen if they fall to lower levels this year. In recent weeks, mortgage rates have been moderating, and many experts expect the 30-year fixed-rate mortgage could dip to 6% in the near future, according to Freddie Mac and chief economists at the Mortgage Bankers Association. Here’s what you need to know.

Why Mortgage Interest Rates Matter So Much for Home Prices

The mortgage rate determines how expensive a loan is. Using a mortgage calculator, check the amortization chart to see how even small changes in interest rates make a big difference. For a $350,000 loan at a 30-year fixed-rate mortgage, a borrower with a 7% interest rate will pay nearly $83,000 more compared to a borrower with a 6% rate.

Between mid-2022 and late-2023, surging mortgage rates pushed typical mortgage payments up by more than $1,000 per month compared to pre-pandemic levels.

Changes in interest rates also affect monthly payments. The same $350,000 loan would have an estimated monthly payment of $2,098 for a 6% interest loan and $2,329 for a 7% interest loan. A $231 difference might not seem like much, but when mortgage lenders are calculating debt-to-income ratios to approve loans, the extra interest costs could push buyers out of the qualification range. A lower interest rate can make monthly mortgage payments more affordable, enhancing buyers’ purchasing power and allowing them to afford larger loans.

The National Association of Realtors (NAR) theorizes that if interest rates dropped below 6%, approximately 5.5 million more households could afford homes. High interest rates tend to push people out of the housing market because loans become too expensive. Fewer buyers can also affect home prices because sellers have a harder time finding people to purchase their homes. In some cases, high interest rates lower home prices.

Lower rates don’t make homes cheaper, but they make loans more affordable. This increases the budgets of buyers because they can spend more money on their home and less on interest payments. Lower mortgage rates reduce monthly payments, making homes more accessible on a monthly basis for buyers.

What Happens to Housing Prices When Mortgage Rates Decline

If mortgage rates drop, there’s no guarantee that housing prices will fall along with them. In fact, history shows that when mortgage rates drop, home prices often increase. Consider the statistics mentioned earlier that more buyers are waiting for better rates, and lower rates could make homes more affordable for millions of Americans. Lower mortgage rates generally lead to quicker home price appreciation and increased competition, especially in markets with low inventory. If true, these buyers could all enter the market as rates drop. The supply of housing would remain unchanged, but the number of buyers would spike. With more buyers than sellers, home prices would rise.

However, home prices don’t always increase when rates drop. Macroeconomic trends like the COVID-19 pandemic and the Great Recession can affect housing costs beyond mortgage rates. Individual markets also vary in how they are affected. However, releasing pent-up demand for homes by lowering interest rates is more likely to increase listing prices on a national scale. Increased buyer demand from lower rates often results in bidding wars, pushing home prices up in supply-constrained areas.

While rate cuts or fed rate cuts can stimulate demand and impact mortgage rates, the most significant effect is generally upward pressure on home prices due to limited supply. However, if housing inventory increases, it could create downward pressure on prices, potentially cooling the market.

What Could Happen If Mortgage Rates Fall Today

The NAR estimates that 1.6 million renters could afford homes if mortgage rates dropped below 6% and millions of other Americans could purchase properties more affordably. However, some existing homeowners might be willing to enter the market, transitioning from starter homes to family properties.

Many buyers who purchased during the period of low interest rates have “golden handcuffs,” where their rate is so favorable that they would rather live in their current home than take on a more expensive loan. Low rates could increase inventory levels if these homeowners listed their properties, but the sellers would also be entering the market as buyers to move to their next home.

There is also currently a deficit of 4.7 million homes, according to the U.S. Chamber of Commerce. A flood of prospective buyers in the market could drive up prices as they compete for available listings and stress over low inventory. The increase in home prices can partially offset the benefits of lower interest rates, leading to a scenario where monthly savings are diminished by higher overall prices.

Mortgage rates are often set based on the spread between the 10-year Treasury yield and mortgage rates, which is typically measured in percentage points. This spread can fluctuate depending on what people expected regarding future rate movements, such as anticipated Federal Reserve actions or changes in the fed funds rate.

This doesn’t mean that lower mortgage rates are good or bad. This is simply one potential reality if the Federal Reserve reduced rates with the current housing supply.

Why Home Prices Don’t Respond the Same Way Everywhere

Talking about the housing market on a national level can be challenging because there are always going to be exceptions to the rule. Housing demand in some areas might remain high regardless of mortgage rates if more people are moving to that area. Supply may remain high in other areas if people are leaving. Hot and cold markets vary across the country, and even within states.

The median sale price of single-family homes has generally trended upward since Q1 of 2009, rising from $208,400 to $410,800 by Q2 2025.

Home sales in your area may be significantly affected by today’s mortgage rates, or not affected at all. This highlights the unpredictability of the real estate market.

Housing supply has increased in recent months, which is expected to ease home-price growth and provide more housing options for prospective buyers.

Will More Sellers List If Rates Fall?

It’s possible that lower mortgage rates could unlock golden handcuffs across the United States, but that’s not guaranteed. One survey found 54% of homeowners feel no mortgage rate would make them feel comfortable selling their existing homes right now. Other macroeconomic factors (like job security and inflation) could keep sellers off the market and in their homes.

However, a lower Federal funds rate could encourage current homeowners to sell, allowing them to move into their next homes. If enough sellers entered the market, the increased supply could cool home prices. Buyers wouldn’t have to compete against each other as much for limited listings and could instead negotiate prices with sellers. That said, sellers are often slower to respond to changes in mortgage rates. This increase in supply could take time.

The number of home sales is expected to begin rebounding in the year ahead, with a forecasted 14% surge in existing home sales in 2026. More homes are expected to come onto the market in 2026, with an anticipated 8.9% jump in inventory.

How Lower Rates Could Impact Buyers

If the Federal Reserve Bank lowers rates in 2026, homeownership would be more affordable to potential buyers. If this improved affordability pairs with low unemployment and other strong economic factors, then more people could enter the real estate market.

However, lower rates could lead to higher prices as multiple buyers bid on available listings. Buyers may need to move faster to tour, place bids, and close on homes in high-demand areas.

Buying when home values are high comes with its own risks. You may be stuck in your home in the future if values drop, delaying your moving goals. However, purchasing a home when you are financially ready allows you to start building equity, which is a key step toward long-term wealth. Home prices are expected to continue to rise, with predictions of a 1.2% to 4% increase in 2026. Rising incomes, combined with stable or slightly declining mortgage rates, are expected to improve the overall affordability of homes in 2026. Regardless of mortgage rates, it’s important not to panic in the buying process. The decisions you make now will affect your finances and flexibility in the future.

How Lower Rates Could Impact Sellers

Reduced mortgage rates could create a larger pool of home buyers in your area. This is overall good news for sellers, who can benefit from increased competition. However, home prices are expected to continue to rise in 2026, but the growth will be modest, with predictions ranging from a 1.2% to a 4% increase. That said, sellers still need to be strategic when listing their homes. If they overprice their properties, they won’t see the increased demand that lower rates bring. An experienced Realtor can run a comparative market analysis (CMA) to understand similar home values and help you set a fair price.

If inventory increases, this could create downward pressure on home prices, making it important for sellers to price competitively. Sellers might also receive fewer cash offers, as more buyers are applying for home loans. They may need to meet certain lending criteria based on the home inspection and appraisal. This means many homeowners also need to be patient and flexible in the sale price.

Common Myths About Mortgage Rates and Home Sales

There are several myths about mortgage rates that impact buyer and seller behavior. The main thing to remember is that the housing market is not a monolith. Changes in one area might not be found in others. Here are a few common misconceptions and assumptions to be wary of as rates change in 2026 and beyond.

• Myth: Lower rates automatically lower prices. Other factors like housing demand in specific areas, the labor market, and political events can have a bigger effect on prices than mortgage rates. Furthermore, lower rates can increase the number of buyers without adding to the housing supply, potentially increasing home prices. In fact, experts expect home prices will continue to rise for the next three years at least, even if mortgage rates drop.
• Myth: You should always wait for the “perfect” rate. The perfect rate could take years to come, keeping you out of the housing market. Buying when rates are reasonable could be a better way to build wealth and live where you are happy, at least until you move or refinance.
• Myth: Rate drops instantly fix affordability. Lower mortgage rates make loans more affordable, not necessarily houses. Listing prices might not drop in your area. In fact, they might increase if there is a sudden influx of buyers. While many expect mortgage rates to fall, it’s important to remember that short term interest rates set by the Federal Reserve also play a significant role in determining mortgage rate trends.

A good rule of thumb is that mortgage rates influence demand, but supply determines price direction. Know what kind of payment you can afford with a 30-year fixed-rate mortgage and see how changes in local home values and rates affect affordability. When you focus on your finances, you can identify when the market is in your favor, regardless of other trends.

What Buyers Should Do If Rates Start to Fall

If you notice that mortgage rates are falling in your area, you can prepare to take action and enter the real estate market. Here are a few steps to increase your flexibility and speed when touring homes.

• Get pre-approved early. Start working with a trusted lender who understands your finances.
• Hire a real estate agent. Have a Realtor you trust available once you are ready to start touring houses.
• Watch local inventory, not just rates. Look beyond national trends and track prices in your area. See how long homes stay on the market. When evaluating affordability, be sure to consider all costs of homeownership, including HOA fees, especially if you are looking at condos or planned communities.
• Be ready to act. Have a plan if you find your dream home at the perfect price. This way, you can move strategically and increase your chances of submitting a winning bid.

You also need to be patient if you are a buyer in a hot market. You may get outbid or miss out on potential homes because of fast-acting buyers. This is a natural part of the purchase process.

What Sellers Should Do If Rates Start to Fall

Sellers also have action items if they are ready to move when rates are falling. Here are a few steps they can take.

• Decide whether to list early or wait. Consider whether now is the right time to move or if you want to hold on until rates drop even lower.
• Prepare the home before buyer demand surges. Start working on repairs, decluttering your home, and investing in curb appeal. Trends for single family homes may differ from condos or townhomes, so consult your agent about local market dynamics to make the best decisions for your property type. This way, your house is ready for listing as soon as the time is right.
• Be realistic about pricing. Make sure your agent is using recent data in their CMA. In a volatile market, your listing price could be outdated within a few weeks. Fair pricing is one of the best ways to sell a house fast.
• Plan to work with mortgage-reliant buyers. When mortgages are affordable, more buyers can take out loans. Understand that the closing timeline may be longer as your buyer secures financing.

Additionally, start gathering your financial documents to prepare to buy your next house. Meeting with lenders and Realtors early on can help with the moving process.

Local Real Estate Experts Help Navigate the Housing Market

Mortgage rates can be volatile, with even small drops leading to home price growth in existing homes and driving up demand for new construction. However, buyers and sellers alike don’t have to act rashly over these changes. They can make strategic moves based on their long-term living and financial goals. 

One of the best ways to take advantage of rate changes is to work with a qualified real estate agent. They can help you understand trends and learn about the local market. An experienced Realtor will take a local approach and use data to answer your questions, not assumptions or national trends.    

Turn to FastExpert to find a Realtor in your area. Compare local agents who understand how rate changes impact your market so you can make smart, confident decisions. Try FastExpert today and hire a real estate professional who can help you be flexible and ready to take advantage of housing opportunities.