After weeks of steady declines, mortgage rates are finally within a range that brings the possibility of homeownership closer to reality for many hopeful buyers.

Although home prices continue to break records, price growth is slowing due to loosening inventory and sluggish demand. At the same time, buyers are gaining purchasing power and leverage when negotiating with sellers.

Still, in the wake of the Federal Reserve’s jumbo-sized interest rate cut in September, many buyers are opting to remain on the sidelines in the hopes that further Fed cuts later this year will lead to more mortgage rate declines.

However, many experts say that now is the best time to take advantage of improved market conditions and get ahead of a potential demand surge that could put upward pressure on home prices and leave many would-be buyers out in the cold.

Housing Market Forecast for 2024 and 2025

U.S. home prices posted a 5% annual gain, according to the latest S&P CoreLogic Case-Shiller Home Price Index three-month running average that ended in July.

Although home prices have decelerated—the July gain reflects a slowdown from the 5.5% annual gain in June—the index still reached another record high, indicating that home prices remain out of reach for many would-be buyers.

“Now that mortgage rates are falling and buyers seem to be jumping back into the market, where will home prices go this fall?” Lisa Sturtevant, chief economist at Bright MLS, posed in an emailed statement. “It is possible that lower rates this fall could actually come along with slower home price growth as more sellers get into the market and inventory continues to rise.”

Ralph McLaughlin, senior economist at Realtor.com, agrees that home price growth will slow—but then rebound.

“With mortgage rates falling to 24-month lows and a high probability of further rate reductions, there is a significant chance that the rate of home price growth will bottom out over the next months and then reaccelerate at the end of the year or at the beginning of next as the purchasing power of homebuyers begins to reflect a more favorable rate environment,” McLaughlin said in an emailed statement.

Given these expectations, experts warn would-be buyers against waiting for more mortgage rate drops to avoid getting caught in a demand wave that reignites home price growth and puts homeownership out of reach.

Can We Expect a Housing Market Recovery in 2025?

For a housing recovery to occur, several conditions must unfold.

“For the best possible outcome, we’d first need to see inventories of homes for sale turn considerably higher,” says Keith Gumbinger, vice president at online mortgage company HSH.com. “This additional inventory, in turn, would ease the upward pressure on home prices, leveling them off or perhaps helping them to settle back somewhat from peak or near-peak levels.”

To be sure, the recent decline in mortgage rates is beginning to help loosen this much-needed inventory. Lower rates are also fueling mortgage originations—albeit gradually.

After peaking at 7.79% in October 2023, the average 30-year fixed mortgage rate has been below 6.5% since mid-August, landing at 6.12% the week ending October 3.

Meanwhile, the Fed finally cut the federal funds rate in September, and more cuts are likely in store. However, the size of those cuts will depend on inflation and unemployment data. Mortgage rates indirectly track this key interest rate banks use as an overnight lending guide.

With the fed funds rate at its highest level in over two decades, would-be borrowers have felt the added impact on their ability to afford a home.

However, as mortgage rates continue their descent, Gumbinger says don’t hope they cool too quickly. Rapidly falling rates could create a surge of demand that wipes away any inventory gains, causing home prices to rebound.

He adds that returning mortgage rates to a more “normal” upper 4% to lower 5% range would also help the housing market, but he predicts it could be a while before we return to those rates.

As far as 2025 is concerned, Gumbinger says it’s a little too early to tell whether the housing market will be in better balance considering all the variables, such as whether or not mortgage rates decline and by how much, and how home prices react amid the unleashing of pent-up demand.

“I would think 2025 will be a better year for housing, but not a great year,” Gumbinger says. “Affordability would only be improved somewhat, even with lower mortgage rates in place.”

How Will the New Rules Impact Affordability?

Now that buyers are more likely to be responsible for paying broker commissions, how concerned should hopeful homeowners be about home affordability in the wake of these changes?

“The greatest impact is going to be buyers that have fewer resources for down payment, closing costs and now the potential of buyer broker compensation,” Matt Side, director of broker development, tells Forbes Advisor.

But the news rules may not only impact a buyer’s budget. Joel Hess, notes that home shoppers, especially first-time buyers, may be shut out from segments of inventory they could have previously afforded.

“A buyer may not look at a home that’s otherwise perfect for them if they don’t have the cash available in their budget to pay compensation,” Hess tells Forbes Advisor.

Nonetheless, Side says buyers should know that sellers will continue offering compensation to the buyer representatives to increase accessibility and boost demand for their homes. Side also advises buyers to have upfront conversations with their lender and real estate agent to help them optimize the terms when negotiating a home purchase.

“Understanding what their limitations may be in purchasing will prepare them for a successful real estate transaction,” Side says.

Source: forbes.com