Mortgage rates are coming down — and home buyers are ready to pounce

For Americans mulling a home purchase, this week’s interest rate cut meant just one thing: It’s time to get back in the game.

The Federal Reserve lowered interest rates by half a percentage point on Wednesday, the first rollback in four years. Average mortgage rates, which peaked at 7.8 percent last fall, have since dropped to 6.09 percent.

And near Boston, real estate broker Dana Bull’s phone is buzzing nonstop. Sidelined home buyers are dusting off mortgage pre-approvals and lining up homes to tour. Others, who bought in the past year, are asking when they should refinance.

“It’s the moment we’ve all been waiting for: People are reinvigorated‚” Bull said. “They’ve had this number in their head - ‘If rates are in the 5′s, even though that’s higher than we’re used to, it’s something we can work with.’ Part of it is affordability, and part of it is psychology.”

Mortgage rates, though not directly controlled by the Fed, are heavily influenced by the central bank’s every move. The housing market is one of the most interest-rate-sensitive parts of the economy and is among the first to react to fluctuations in the federal funds rate, set by the Fed.

This time around, mortgage rates for a 30-year fixed loan have fallen a full percentage point since May, in anticipation of the Fed’s cuts. That means someone with a $2,000 monthly mortgage budget can now afford a house that costs about $50,000 more, according to Lawrence Yun, chief economist at the National Association of Realtors.

In San Diego, Jonathan Alvarado and his wife started their home search a couple of weeks ago - and, after securing a 4.99 percent mortgage rate, quickly made an offer. They’re planning to close on their first home, a newly built two-bedroom for $592,000, in early November.

“Initially the timing did not seem right to us at all - the rates were crazy, prices were crazy, we were out of our comfort zone,” said Alvarado, 24, who is studying finance after nearly four years in the military. “But when we saw that 4.99 interest rate, it was like, ‘Okay, this is it.’”

Momentum has been steadily building in anticipation of this week’s rate cut. Fresh data Wednesday showed that both housing construction, and mortgage and refinancing activity have picked up in anticipation of the Fed’s interest rate cuts. New mortgage applications jumped 14.2 percent last week, while refinance applications spiked 24 percent, according to new data from the Mortgage Bankers Association.

“It feels like all of a sudden someone turned the faucet back on,” said Samantha Tunador, a mortgage loan officer in Ashburn, Va., who’s seeing rising demand for both mortgages and refinances. “All this talk of lower interest rates is definitely piquing peoples’ interest. We’re busy, we’re very busy.”

Although the tide may be turning, economists say it’s still unclear exactly how things will shake out in the coming year. On Wednesday, Fed leaders estimated they would continue cutting rates by another 1.5 percentage points or so by the end of 2025, though those forecasts are routinely revised.

“As rates come down, people will start to move more, and that’s probably beginning to happen already,” Fed Chair Jerome H. Powell said in a news conference following Wednesday’s rate cut.

But, he stressed, it’s tough to “game out” the housing market because there is a long-standing shortage of available homes.

Economists say an onslaught of new demand, especially from homeowners who have been reluctant to give up their cheap mortgages, could drive prices higher in many parts of the country.

“We may be at an inflection point: Lower mortgage rates are going to draw more people into the market, resulting in bidding wars and price increases,” said Daryl Fairweather, chief economist at Redfin. “Prices will grow faster, and they’ll grow faster than they would’ve if mortgages rates hadn’t come down.”

That’s making it confusing for many potential buyers to figure out exactly when to jump back into the housing market. Buy sooner, when rates are higher but prices are lower? Or wait until the opposite might be true?

Mac Rice, who lives with his parents near Boston, began his house hunt this spring in hopes of “getting ahead of the curve, before there’s a flood of other buyers.” But the reality of a largely stagnant housing market means there are few options, especially in his price range of about $400,000. He’s still looking and feeling increasingly anxious about the whole thing.

“I was feeling a lot of pressure to get something quickly before everyone else had the same idea,” said Rice, 25, who has an office job at a construction company. “But it’s been hard to get a read on things. I have so many doubts and questions and insecurities, and don’t have enough saved up to compete in bidding wars or with all-cash offers.”

The housing market has been one of the most vexing parts of the post-pandemic U.S. economy. In 2020, the Fed slashed its benchmark interest rate to near zero in a desperate attempt to rescue the economy - a move that collided with households’ sudden urge to work remotely and seek out more space. The rush of demand sent home prices soaring by 40 percent in two years. Bidding wars and all-cash offers abounded as people clamored for any available home. That picture changed in 2022, when the Fed began hoisting interest rates to tamp down on inflation, slowing the housing market and lifting the 30-year fixed rate to a 23-year high.

Now comes the Fed’s rate cut. Realtors around the country say first-time home buyers who had given up on their searches are starting to dip their toes back in, as a way to escape rising rents. Soon, they expect more existing homeowners - who had been clinging to their low mortgage rates instead of putting their homes up for sale - will follow suit, especially once average rates dip to 5.9 percent or lower. Right now, 1 in 5 mortgage holders have an interest rate below 3 percent, while 3 in 5 have a rate below 4 percent, according to Redfin.

Shawn E. and his family of four outgrew their three-bedroom home in Central New Jersey years ago. But after being outbid multiple times, they put their search on hold until this summer, when mortgage rates started easing. In August, they went under contract for a new house, with a 6.125 percent rate they can adjust once before they close this fall. They plan to put their current home up for sale by the end of the year.

“We’ve been waiting and waiting and waiting,” said Shawn E., 36, a tech worker, who spoke on the condition that he be identified by first name and last initial out of concern the sale might fall through. “It’s finally working out, but I’ve definitely lost some hair over this.”

While things are picking up, it remains to be seen how sudden or drastic the shift might be. Survey data from the New York Fed released in May suggested lower rates would spur some people to move. But people were already moving less before the pandemic, and many respondents said they didn’t have plans to relocate in the next few years.

“What people are struggling with right now is how to time things,” said Bull, the real estate agent near Boston. “It feels like Russian roulette - are rates going lower? Will prices go higher?”

Bull said she’s starting to see houses rack up multiple offers again. Last week one of her clients was up against seven other bidders - something that would’ve been unlikely even a few weeks ago.

“It goes in lockstep,” she said. “Rates come down, people want to move.”