Mortgage rates have already fallen at least a percentage point below their 2024 peak. Cuts are expected to continue through the end of the year and on into 2025. Many of us have been waiting for this – something that will finally jog the frozen real estate market and get us towards more palatable conditions.

But make no mistake: these cuts are not a cure-all for the real estate market. In fact, we may see that decreasing mortgage rates backfires. It all comes down to supply and demand. Lower rates mean increased housing affordability. That’s good! But when demand is pent up, those appealing rates can translate into higher home prices. And, in some cases, we may not see much change at all.

At the same time, we may also see the desired effect in specific markets. It all comes down to a few key factors. Remember, fellow real estate investors: each market is highly individual, and multiple factors determine how a market reacts to stimuli. This isn’t for predicting or diagnosing the machinations of the real estate market but to increase our understanding.

3 Indicators Slashed Mortgage Rates Will Impact Real Estate Markets

Indicator #1 – The market has high mortgage usage.

The number of people utilizing mortgage lending – varies from market to market. In more affordable markets (as in Mississippi or Louisiana), there tend to be more people who buy outright. Mortgage rates, then, don’t affect these markets as much.

High mortgage usage can have a few different effects. On one end of the extreme, you have homeowners who locked in those coveted 3% rates during the pandemic. These owners are considered “locked in” because mortgage rates and home prices alone will rarely incentivize them to give up that excellent rate. This isn’t to say they won’t move, but that as a purely fiscal decision, they’ll likely try to avoid doing so.

Data shows that 84% of homeowners paying a mortgage have a rate under 6%. As rates drop below that point, we’ll see more “unlocked” homeowners and an increase in real estate transactions.

Indicator #2 – New supply is on the rise.

Though mortgage rates have been the big talking point, they’re not the big issue with the real estate market. The real problem lies in unbalanced supply and demand. We’ve discussed this at length (Check out 5 Ways Short Supply is Changing SFR Investment Strategies!), so we’ll keep the recap brief. Over fifteen years of underbuilding has thrown supply and demand out of whack. It’s why the real estate market has seemed like a pressure cooker since the pandemic!

Dropping interest rates stimulate demand. If supply cannot meet that demand, home prices rise. If supply is suited to handle demand, we’re likely to see prices stabilize and ease back down to more sustainable levels.

The demand in any given market is determined mainly by economic indicators, such as job availability and cost of living. Supply increases both with new construction and as owners “unlock” and see selling as an intelligent move.

Indicator #3 – Buyer sentiments.

The ebb and flow of the real estate market is not always determined by cold, hard facts. At the end of the day, buyers and sellers are people. And people are not always rational. Instead, we make decisions under the influence of emotion and sentiment.

Lower mortgage rates may not positively impact the market if there is economic uncertainty, job losses, or concerns about a recession. Even with low rates, potential buyers may hesitate to take on new debt in such conditions. Homebuyers may worry about future costs if inflation is high or on the upswing. They’ll be less willing to buy a home if they don’t feel good about the future!

Now, this sentiment, again, can vary wildly by market. Areas with solid diversification, job growth, and a higher quality of life have better prospects for real estate demand. While we can’t necessarily gauge the feelings, we can see their effects. What do real estate transactions look like in the market? Are new businesses moving in? Is there population growth? These can give indications as to how people feel about market conditions.

Ultimately, knowing how slashed interest rates will impact real estate is tricky. We recommend investors look carefully at their markets and pay close attention in the coming months. You may find new opportunities in unexpected places.

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