Why Did Mortgage Rates Just Drop? And Why That Makes Buying Harder

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Rates dropped this week — here's why

Welcome to Mortgage Mom Radio. I'm Debbie Marcoux, the Mortgage Mom, and every week I bring you everything that's up to date and happening in the mortgage and real estate world. This past week we've actually seen a really nice drop in interest rates, so we're going to talk about why — and about what it means for you. I also found some great information that drives home a point I've been making week after week: things are going to get kind of crazy when those rates come down a little further.

Rates really started dropping last Thursday and Friday, and so far this week — Monday, Tuesday, Wednesday — they've been holding very strong. So why did we see that drop?

Number one: last Wednesday the Fed had their meeting. At the meeting before that one, they had said they planned to increase rates at least one more time before the end of the year. Then at this last meeting they said they were going to hold rates where they are for now, and that they may possibly be done — they may not do any more hikes. That got the market rolling. Everybody got excited, thinking we might be done, and that “higher for longer” would have started back in July of this year. July 2023 is the last time the Fed increased rates. So we might already be on our way through higher-for-longer, which means there's a light at the end of the tunnel.

Then, to throw fuel on the fire, Friday's jobs report came in well below what was expected — fewer jobs created than anticipated, more unemployment. That makes investors and analysts say the Fed can't raise rates again, they really have to be done, because now we're finally seeing the effects in the labor market. The Fed said at the very beginning that the hikes were going to slow everything down, including job creation. But it didn't happen — they kept hiking and hiking and jobs kept staying strong, which gave a false sense that they could keep going to get inflation under control. Now we're finally seeing what they've done show up in the jobs numbers. So a lot of people feel the Fed is done, higher-for-longer started in July, and there's a light at the end of the tunnel. Rates came down on that.

Why falling rates make it harder to buy, not easier

I've talked a lot on this show about what happens once rates start coming down. People hear that rates are improving. They start to feel like there's a light at the end of the tunnel — like if they buy something today or refinance today, there will eventually be an opportunity to refinance again and drop that payment. It sparks interest. It gets people riled up. And when that happens we start to see more and more people out on the streets getting pre-approved and looking at homes. It gets crazier as far as competition goes: writing offers, trying to get offers accepted.

Right now, over roughly the last four to six weeks, we've seen our buyers writing offers and getting credits from the seller to help buy down the rate, to pay some of the closing costs. We've seen room to negotiate on price, and we've seen price reductions. And now, all of a sudden, a rate rally.

I want to give full credit here to a loan officer and branch manager I've known for a very long time — he was my manager years ago, he's at a very respected national mortgage company, and I've never once seen him put out false information or push someone into something because it benefited him. He posted this a couple of days ago and he couldn't have said it better:

“Last week we saw a huge improvement for mortgage interest rates. Reach out to see if we can help you with either a purchase or refinance. For those of you looking to purchase, keep in mind that every 1% drop in rates, there will be roughly 3 to 4 million more people in competition on the buyer side. As rates drop, that means more buyers fighting over the same limited housing inventory.”

He is 100% correct, and we've said it numerous times before. As rates drop, how much of a loan you can qualify for goes up. You qualify for more, more people get into a higher price range, more people land in the same range you've been sitting on the fence about — and the competition grows because more people are out doing it.

So get ahead of the competition. If you've been thinking about buying, get the pre-approval done. That is very important. Once the multiple offers and the craziness start, it becomes very difficult to get an offer accepted unless you're an all-cash buyer, or you have perfect credit and a large enough down payment that it doesn't matter if the appraisal comes in low, because you can bridge the gap between the appraised value and the over-list offer it took to beat everyone else. Get out in front of the herd.

Q&A: how much down payment do you need?

Brooke asks: “What is a good number as far as a down payment?”

Great question, and one people haven't asked in a while. The down payment you need is really determined by the monthly payment you're comfortable with and the sales price you're hoping to buy in. So: where are you located, what area do you want to buy in, what kind of home do you want — a condominium to get started, a little one-bedroom, or are you hoping for the single-family three-bedroom, two-bath American dream? What does that cost in your neighborhood? And what's the monthly payment you can afford? From there we can determine how much down payment you'll need to get into that home.

We've got tons of loan programs. There's down payment assistance, which can get you in with zero down or 1% down. If you're a veteran, you can get in with zero down. And if you don't use down payment assistance — and let's face it, assistance is hard to get and hard to qualify for, the interest rates are higher, and you don't qualify for as much in sales price — then when you can put a little of your own skin in the game, three and a half percent down for an FHA loan or 5% down for a conventional loan gets you in.

A lot of people hear their parents, their neighbors, their friends, their grandparents say you have to have 20% down or you shouldn't buy that home. We can get you in with a lot less money down. It's also very important to know that you're qualifying for that home and that you can make that monthly payment.

Two years of hikes pushed people into seconds — and now what?

Think about the last couple of years. Rates started climbing in 2021, and in 2022 the Federal Reserve just started pumping it — three-quarters of a point every six weeks, over and over. So for the last two years or so, anybody who wanted to pull cash out of their house — to pay off debt, do home improvements, pay for a kid's college, pay the IRS — mostly didn't do a full refinance the way people used to. They went the home equity line or home equity loan route instead. So now you have two separate monthly payments: the first mortgage you didn't want to touch because the rate was so low, and a second loan at a considerably higher rate.

If that's your situation, that may still have been the right call, and for someone needing cash today it may still be the right route rather than a full refinance. But right now is the time to perk your ears up. As you hear rates coming down, this is going to become the opportunity to refinance and consolidate that first and second into one loan — a better rate overall, a better monthly payment, better cash flow.

Remember that home equity lines of credit are adjustable. Every time the Federal Reserve raised, that line went up, and up, and up. I know you feel it — you've seen the payment change. And every payment you make isn't paying the balance down, because the payment is interest only. Eventually we've got to get you into a principal-and-interest payment that actually pays the balance down and improves your cash flow. So start tuning in, because your chance to execute is right around the corner and you want to be able to take advantage of it.

Q&A: does a pool add value?

Ashley writes in from the Las Vegas area: “We're thinking of putting in a pool but worried it won't do much for our property value down the line. Any advice?”

Fabulous question, and I love that it isn't today's topic — ask anything you want, because I guarantee somebody else is wondering the same thing.

Putting in a pool does help your value. It doesn't help dollar for dollar, and it depends on what kind of pool: are you including a spa, a big waterfall, a rock structure with a grotto, or is it a basic pool and spa? In all the years I've been doing this, on the majority of appraisals I see, when one home has a pool and another home in the neighborhood is the same model match — same floor plan, same square footage — without one, we usually see about $25,000 to $40,000 in value for that pool. You can actually put a pool in for $40,000, but it's going to be pretty basic; the more elaborate pools can run $100,000. So you won't get dollar for dollar, but your home will be worth more than the neighbor's house without one.

Here's the Mom advice, though. A pool is personal. If you and your family love it and you're truly going to use it, you'll get value out of it — and the memories in that backyard don't carry a price tag. Choosing to build one should be like choosing to buy a boat or an RV: those things don't hold their value and they depreciate, and you're not buying them as an investment. You're buying them for what your family gets out of them. Then, on top of that, yes, you will get some value in the house.

Q&A: consolidating a 3% first with a 3.85% equity line

Armando asks: “First loan is at 3% and my second, a home equity line, is at 3.85% for the next four years, but I need to merge those into one fixed loan — hoping for lower rates soon.”

You got a fabulous deal. You have a fixed rate on that line of credit for a set number of years before they can adjust it on you — somewhere around the fourth or fifth year — and that's not a common home equity line. Those exist, and I believe you got yours through a credit union, but you took that line very early on as rates first started to climb. You're a year or two into it already. Those would not be starter rates today; even at the same institution, a new line would start much higher now, because the Federal Reserve has raised so many times since.

But yes, you're absolutely right that you'll want that consolidated when you can. All you have to do is keep listening — I'm going to let everybody know when rates come down far enough that the refinance makes sense.

Q&A: does repiping add resale value?

Angel asks: “We're repiping the gas lines throughout the entire house, which will have a lifetime warranty. Will this add value once we sell?”

First, a disclaimer: I'm not a real estate agent any longer. My license is no longer active. I was an agent in the past, and I've been 100% lending since 2002.

My answer: you're probably not going to get added appraised value — your home isn't going to be worth more than your neighbor's on paper. But say your house and your neighbor's house are both on the market, model matches, same square footage, same layout, and yours has been repiped and theirs hasn't. There's a very good chance a buyer walking through both leans heavily toward the one where the work is already done, because it's something they don't have to do.

And you might get more value than you think, because we all know how it goes: you repipe the house, they tear up some of the walls, you decide to repaint, then the floors happen, and the next thing you know you've renovated the home and you've got a beautiful finished property. In that situation, yes, your home could be worth quite a bit more. If we're talking just the gas lines or the water lines by themselves, you're getting an edge over the other property on the market rather than a higher appraisal.

Because I'm no longer licensed on the real estate side, I want to be very clear that I'm not the right person to give you the definitive answer. Call my office and ask for the agent on my team who holds both a real estate license and a mortgage loan officer license — she's held her real estate license since the mid-90s, she doesn't ever do both sides for the same client, and she can confirm this for you properly.

Q&A: any crystal ball on 5% rates?

Vern asks: “I got into my new home about a year ago on a fixed 30-year at 6%. Any crystal ball predictions on how long it will take, if ever, to get below 5% again? I'm in Washington.”

Good reminder that I'm licensed in 11 states — the whole West Coast plus a number of others — so wherever you're watching from, reach out and we'll tell you if we can help.

On the crystal ball: I wish I had one, because I wouldn't be doing the show, I'd already be rich. But putting on my Mortgage Mom hat — I think the Federal Reserve is going to say for the very first time that they're willing to reduce rates around the middle of next year, in one of the summer meetings. Once they start that downward move, I do think it's possible to see 5% rates again.

A lot of people got very spoiled by rates in the twos, threes, and fours. Those were unprecedented. We have never had rates like that in the history of mortgage financing, at least not in the 30 years I've been in this business. So I do think we'll absolutely see the 5s again. How long will it take? Maybe another 12 months, maybe 18.

And look at what's happened along the way. The national conforming average was sitting at 7.875%, and in the last four or five business days it's dropped by about half a percent, so we're somewhere around 7.25 or 7.375 now. It can change quite quickly — and that's without any reduction in the Fed funds rate at all. When they do start cutting, I think we're going to see some pretty dramatic changes quickly.

Vern, if you're at 6% because you locked a year ago, you're in great shape. Keep it, keep making your payments, keep doing what you're doing, and stay tuned so you know when it's time to start that refinance.

Wrap-up

Interest rates dropped fast. And as soon as people start hearing that rates are dropping — and the loan officer whose post I read is far from the only one out there saying it — the news is going to spread like wildfire. Everybody who's been on hold, everybody who's been waiting to get started, waiting to get pre-approved, waiting to jump back into the market, is going to start stirring. Inventory is still very low, so there's going to be a lot more competition. Half a percent in the last four business days already means we've sparked a million to a million and a half people into thinking about getting pre-approved, and as rates keep dropping there will be more and more.

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