Mortgage rates play a pivotal role in shaping the housing market, and as they begin to dip, both buyers and sellers are keeping a close eye on the shifting financial landscape — hoping for conditions that feel less risky and more like a green light to move forward.
"Rate cuts typically have an initially positive psychological effect on buyers, as they perceive them to mean that the cost of financing a home will be lower," said Carl Gomez, real estate economist at CoStar. "However, that euphoria can be short lived. For example, the Fed cuts in 2024 did not translate into significantly lower borrowing costs for buyers and as a result, did not flush out stronger activity or a fulsome pickup in pricing."
The current rate cuts, while similar to last year, are happening in a different economic environment.
“This time feels different from last year. A year ago, after the cut, mortgage rates dropped but then bounced higher because the economy was still running hot — jobs were strong and the labor market was powering demand,” said Nadia Evangelou, National Association of Realtors senior economist and director of real estate research.
This year, however, the economy is slowing. Unemployment has risen to 4.3% and inflation is down from last year but still above the Fed's target of 2%. The Bureau of Labor Statistics revised the jobs report data revealing that more than 911,000 fewer nonfarm jobs were added this year and that the economy lost jobs in June.
While the Fed doesn't directly control mortgage rates, they set the federal funds rate, which ripples across the entire financial system. The market is anticipating the Fed to cut rates next week, which is already being reflected in mortgage rates.
Mortgage rates have fallen to 6.35% — a new low for 2025, according to Freddie Mac's report Thursday.
Why mortgage rates matter to sellers
As rates decrease, more people should be able to afford homes due to lower interest payments.
"Sellers have the luxury of time to see if lower mortgage rates ultimately stimulate a deeper pool of potential buyers and a higher selling price for their homes," said Gomez.
For example, a buyer purchasing a $500,000 home with a 10% down payment and a 6.35% interest rate on a 30-year fixed loan can expect a monthly payment of $3,709, according to Homes.com's mortgage calculator. At a 7% interest rate, a buyer would pay an extra $194 more per month or $2,328 more per year. Over the life of the loan, the higher rate would be close to $70,000 in additional interest payments.
By contrast, a $500,000 home purchased with a 10% down payment at the record-low 2.65% interest rate in 2021 would come with a monthly payment of $2,722. With their deeply low interest rates and comfortable monthly payments, many pandemic-era buyers have been reluctant to sell.
“Many homeowners are locked in, but they’re starting to realize that those historically low rates — 2% or 3% — are not coming back,” Evangelou said.
Not every home seller has the luxury of time to wait for the perfect market.
"The main risk of waiting is if the seller is under pressure to sell due to financial or family circumstances," Gomez said. "In that case, they may need to accept a price that is lower than their expectations."
Shifts in selling inventory
High mortgage rates and a sluggish housing market kept many homeowners from moving, but that has started to change.
“Inventory is at a level we haven’t seen since 2020 when the pandemic hit. We’re seeing more existing homes available for sale,” Evangelou said.
NAR reports that 1.55 million units of existing homes are on the market. As rates are expected to drop, it's not only first-time buyers that will be given more purchasing power — sellers will, too.
“Older homeowners who’ve built up equity can downsize," Evangelou said. "Even if the rate is higher than what they had, the payment may be the same or smaller because they’re moving to a smaller unit.”
With more inventory and greater purchasing power, mobility in the housing market is increasing. Sellers may now be able to list their homes and afford to buy a new one.
That said, the increased inventory could also mean the days of homes selling for $100,000 over asking are numbered.
“Sellers have to be very rational about pricing — not to overdo it," Evangelou said. "They should work with their Realtor (real estate agent) to price it right, based on comparables.”
Pricing may remain more competitive in some markets while cooling off in others.
"Pricing strategies in the housing market always need to align to local market conditions and not necessarily what is occurring with interest rates," Gomez said. "Local market conditions can vary due to many other factors beyond interest rates."
According to the Mortgage Bankers Association’s August forecast, rising inventory is expected to slightly slow home price appreciation by the end of 2025, with the potential for prices to dip into negative territory in 2026. However, NAR forecasts continued price growth into 2026.
Mortgage rates and recessions
Given shifts in unemployment, economists are wary of a recession, which is when economic activity declines across the system. It's often characterized by rising unemployment and shrinking gross domestic product, or GDP.
"If the economy does enter recession, mortgage rates are likely to drop faster than in our baseline forecast, which would push up refinance volume, but would lead to a sharper increase in the unemployment rate, which would slow the purchase market," the Mortgage Bankers Association report said. "Alternatively, if the tariffs result in stickier inflation rather than just being the result of a one-time price increase, the rate path could go higher, leading to fewer refinances."
For homeowners, economic strains may force them to sell.
"Economic factors such as unemployment can result in forced selling as some homeowners can no longer afford to service a mortgage if they don't have a job," Gomez said. "That is why recessions are often correlated with distress in the housing market — the global financial crisis was a prime example of that situation. But inflation and the rising costs of homeownership can also similarly push some homeowners to sell if the cost of carrying the home become unmanageable."
Deciding to sell needs to be based on several factors outside of interest rates.
"Perfectly timing the cycle is very difficult in real estate because of illiquidity," Gomez said. "For sellers, optimizing their expectations for both their sales price and potential purchase price around what they can realistically afford at current interest rates is usually the most prudent strategy."