Falling Mortgage Rates Bring Some Home Buyers Back to Market

Earlier in the pandemic, when many urbanites were leaving New York to work remotely in far-flung locations, Molly Parker Wade instead moved from the West Coast to Brooklyn to be closer to her family.

After a year of renting, Ms. Wade, a 35-year-old public relations executive for Amazon, was ready to buy, just as the cost of home loans began to climb sharply. Late last year, mortgage rates hit a two-decade high, putting a chill on the housing market — and her buying plans.

“I spent 2022 learning about mortgages,” she said.

Though she was nervous about rising rates, Ms. Wade closed on a $975,000 one-bedroom apartment in Crown Heights in December. “It felt like the right thing to do at the right time,” she said.

Home buyers are edging back into the market after being sidelined last year by a jump in borrowing costs and soaring housing prices. Although mortgage rates are coming down, making purchases relatively more affordable, real estate experts say what matters more for buyers and sellers now is the state of the economy — and that is especially hard to gauge.

“It’s jobs, jobs, jobs,” said Sam Khater, the chief economist at the mortgage finance giant Freddie Mac. Although the economy is solid, “if all these recession forecasts come to fruition, it would be a big deal,” he added.

The U.S. economy grew at an annual rate of 2.9 percent in the fourth quarter of last year, the government reported last week, as Americans continued to spend despite stubbornly high inflation. The International Monetary Fund this week projected that the U.S. economy would slow this year, and the jobless rate would rise, but there was “a narrow path that allows the U.S. economy to escape a recession altogether, or if it has a recession, the recession would be relatively shallow,” according to the organization’s chief economist.

As part of their effort to tame rising consumer prices, Federal Reserve policymakers raised interest rates again on Wednesday, by a quarter of a percentage point, to a range of 4.5 percent to 4.75 percent, the eighth increase in 11 months. Fed officials are trying to slow the economy enough to bring inflation back under control, without inducing a severe recession.

“Activity in the housing sector continues to weaken, largely reflecting higher mortgage rates,” the Fed chair, Jerome H. Powell, said after the central bank’s announcement.

The Fed’s actions have helped cool the once-hot housing market, but mortgage rates have recently started to fall again — partly on investors’ expectations that the central bank’s campaign of rate increases is nearing an end — which could spur more activity in the housing market. New-home sales, which are particularly sensitive to changes in mortgage rates, rose 2.3 percent in December from the month before, the Census Bureau reported last week.

Because stronger economic growth could lead the Fed to raise rates higher, and keep them elevated for longer, home buyers and sellers face a tricky balance of their confidence in the economy and what that might mean for borrowing costs. They, like Fed officials, would like to see a so-called soft landing, in which the economy cools in such a way that inflation moderates but doesn’t slow so much that it makes big-ticket purchases like buying a home more daunting than it already is.

Falling mortgage costs “will generally boost demand a little bit because more folks will be able to buy,” said Nicole Bachaud, senior economist at Zillow, a site that estimates home values. But she cautioned that home prices, which have been ticking lower on a monthly basis, remained high because owners who had locked in low rates years ago had little incentive to sell now.

“We will be seeing prices fall for the next few months, but that will be minimal,” she said, predicting a price decline of 1 to 2 percent nationally in the coming year.

More homes are being sold at or below list price, but many sellers are not budging, Ms. Bachaud said. New listings have slowed to a trickle, and homes are staying on the market for longer. Sales of existing homes fell 1.5 percent in December, the 11th consecutive monthly decline, according to the National Association of Realtors.

Industry watchers say that reluctant owners will be more likely to put their homes on the market if average mortgage rates fall another half a percentage point, to 5.5 percent.

“Five and a half is where people get really comfortable,” said Nicole Rueth, a senior vice president at OneTrust Home Loans, a lender based in Denver. Until then, she added, owners will be motivated to sell by personal circumstances: “I’m having a baby, I’m getting married, I need to downsize, I need to move for my job.”

For Jessica Grupp, buying a home coincided with the end of her active duty in the Navy. She had been renting in San Diego, and she wanted to stay after she finished her service. “I’ve wanted to buy here for a while,” she said.

As the market cooled and conditions became favorable again, Ms. Grupp, 33, found a two-bedroom apartment in the city’s University Heights neighborhood. Her offer of $640,000 — $10,000 below the asking price — was accepted, and she moved in with her dog, Kanna, in October.

Now a consultant for PwC, Ms. Grupp is happy she bided her time. “For me, it was finding a place that fit my lifestyle and budget,” she said.

More stories like hers would be welcomed by the real estate industry, which struggled last year as the market slowed down. Several online brokerage firms — including Compass, Redfin and Zillow — have laid off workers. Redfin and Zillow have closed their house-flipping businesses. Rupert Murdoch’s News Corp is reportedly in talks with the commercial real estate data provider CoStar to sell Move, a digital real estate business that includes Realtor.com and related sites.

“Home sales are probably bottoming out now or will in the first quarter this year,” said Lawrence Yun, the chief economist for the National Association of Realtors. The resilient economy, solid job market and low levels of mortgage defaults are among the reasons the housing market is stabilizing, he said, and he predicted that mortgage rates would slide to 5.5 percent by late spring or early summer.

“Stability is good, especially in light of the big changes that occurred in the past three years,” he said.