Lower Mortgage Rates Could Heat Up the Housing Market. What Needs to Go Right.

A busy autumn for home sales could help builders sell through some of their inventory. Photo: Mario Tama/Getty Images

Housing’s third bad year in a row could turn around if mortgage rates decline or continue to hover near 2025 lows. That is a big “if.”

The recent drop in 10-year Treasuries, with which mortgage rates move, prices in a host of assumptions about the economy and the path of monetary policy that could be dashed by fresh data or commentary from the Federal Reserve.

The machinations behind lower rates are of less concern to buyers than the savings: The drop in the 30-year fixed rate since the end of July, to a recent level Mortgage News Daily pegs at just under 6.3%, would save a buyer a little more than $120 a month on a $400,000 loan. A homeowner who bought when rates were closer to 7%, or even approaching 8% in late 2023, could also stand to save by refinancing.

The recent drop was enough to coax some buyers back into the market. The Mortgage Bankers Association said Wednesday that its measure of applications for a mortgage to buy a home increased last week a seasonally adjusted 7%, to its highest level since July.

The timing could be right for a pickup in demand. Housing’s traditionally hot season revs up in February and March, builds through the early summer, then dies down as would-be buyers take vacations and settle into the school year. But usually there’s also an autumn pickup.

“At least in terms of the national data, the seasonal pattern is really pretty important,” says Mike Fratantoni, the chief economist of the Mortgage Bankers Association, noting that demand after Thanksgiving slows to a crawl. “That does give us a couple of months of what I expect are going to be certainly a stronger September and October than we’ve had the past couple of years.”

A busier fall wouldn’t immediately flip the switch on a slow and affordability-constrained national housing market. But it would help builders sell through some of their built-up inventory, says Jay McCanless, a Wedbush analyst covering home builders.

As of July, it would take more than nine months to sell through every new home on the market at that month’s sales pace, census data show. Builders have had to offer discounts and buyer incentives to sell houses, at the expense of their margins. “If the rates stay at these levels for more than a minute, it’s going to line up nicely” with seasonal patterns, McCanless says.

Mortgage rates hanging near their recent lows, or dropping further, would be welcome for both first-timers and homeowners who feel financially locked into their current houses.

But the coming weeks’ economic calendar could turn things around. Markets are broadly anticipating the equivalent of three 25 basis point Federal Reserve rate cuts by the end of the year, according to CME FedWatch.

The Fed doesn’t control long-term interest rates like mortgages, but expectations for future economic conditions, including future monetary policy changes, are baked into long-term bond yields, and mortgage rates by extent.

That means mortgage rates can rise even as the Fed cuts target rates. That scenario played out in 2024, when mortgage rates fell significantly in the run-up to the Federal Open Market Committee meeting, then rebounded in the following weeks.

“They may cut 25 basis points next week, but depending upon how [Federal Reserve chair Jerome Powell] characterizes the conversation in the press conference afterwards, absolutely you could see long-term rates bounce back up,” says the Mortgage Banker group’s Fratantoni. “It’s not just what they do next week, but what they indicate about what they’re going to do in the future.”

Hotter-than-expected inflation data also risks sending the bond yields that drive mortgage rates higher. Investors should keep an eye on August’s Consumer Price Index data release, expected Thursday morning. Economists estimate that prices rose an unadjusted 2.9% from the year prior, according to FactSet. Future inflation expectations and releases will also play a part.

“There’s a suspicion that as we get into the back half of this year, and then maybe into next year, you’re going to be closer to a 3% inflation,” says Rick Palacios, Jr., the director of research at John Burns Research and Consulting. “That directionally doesn’t speak to long-term rates collapsing.”

Even if rates stay near recent levels, or give up further ground, the reason why will be critical. A weaker labor market, which is another reason why long-term bond yields could fall, isn’t a particularly favorable environment for homebuying.

“You’re going to have a more difficult time convincing the consumer to pony up and purchase a home when they’re very concerned about the security of their job or finding a new job,” Palacios says.

Write to Shaina Mishkin at shaina.mishkin@dowjones.com