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Falling mortgage rates, a recovering housing market — Is it a good time to buy a house?

Hal Bundrick
Updated 7 min read

The Federal Reserve has begun cutting interest rates, the number of homes for sale is growing, and sellers are reducing their asking prices.

But.

While incrementally improving, almost every metric of importance to a buyer in the single-family housing market today is worse than before the pandemic.

Is it a good time to buy a house?

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In this article:

Read more: Is it a buyer's market or seller's market? How to tell the difference.

One of the first considerations for would-be home buyers is likely to be mortgage rates.

Of course, we are not in the glory days of sub-3% home loan rates. However, mortgage rates have fallen below their 52-year historical average. Based on data collected by Freddie Mac, the 30-year mortgage rate has averaged 7.72% since April 1971.

If it makes you feel any better, the highest mortgage rate on record was 18.63% in October 1981. However, with the Fed beginning a cycle of lower interest rates, there is a hint of optimism in the air.

Take action: Use a mortgage calculator to determine the monthly payment you can afford. You can then find the home price, down payment, credit score, type of home loan, and mortgage interest rate to get you to your home-buying goal.

Read more: How to get the lowest mortgage rates

Realtor.com's latest market analysis shows that homes on the market grew nearly 36% in August compared to last year — with for-sale inventory at its highest level since May 2020.

Sellers are rethinking their listing prices too. Homes for sale with price reductions were the highest for an August in over five years.

Take action: Consider expanding your search to more affordable areas close to your favorite neighborhood if it's too pricey.

New home construction is booming, with inventory at its highest level since January 2008. However, most of those houses are still under construction.

Take action: If you want to buy a house now, consider new construction. You may be able to choose some finishes or make an even better deal on a spec home that's been on the market for a while.

Read more: When will the housing market crash again?

House prices are still rising and were up 5.2% year over year as of June, according to the Freddie Mac House Price Index.

"However, the inflation-adjusted (real) house price growth since 2019 has been more moderate than what the nominal rates suggest," a Freddie Mac analysis said. That's because dramatic increases in home prices during the pandemic have eased, and in some cases, even reversed.

Take action: Look for homes with price reductions where you want to live. Then, negotiate even harder.

Learn more: When will housing prices drop?

To answer the question of whether it's a good time to buy a house for you personally, you must look beyond broad market forces. Buying a home is more than considering macroeconomic factors. It's an important life decision based on your personal and financial situation.

Read more: Should you buy a house?

When you rent, the decision to move is broken down into six months, or a year or two at a time, as your lease renews. But every dollar-related detail makes a home purchase a medium- to long-term investment. Buying a house includes various costs: the down payment, closing costs, and financing fees, moving expenses, property taxes, and perhaps selling the house you're in now.

Homeownership requires a long timeline. How you make a living, your friends, family, and even community amenities all come into play.

A primary consideration: your job. Will it require a location change anytime soon, or can you live where you please? Is your income steady and all but assured?

Read more: How much house can I afford?

One of the significant factors that will qualify you for a home loan is your credit score. It's important to know it before applying for a mortgage.

For the most common loan, a conventional mortgage not backed by a government agency, you generally need a FICO score of 620 or better.

FHA loans can allow a credit score as low as 580 with 3.5% down. VA loans issued to qualified military service members and veterans don't officially have a minimum credit score, though some lenders will require a FICO score of 620.

Of course, minimum scores are the entry-level to qualifying; the higher your score, the better the loan terms you'll be offered. Most importantly, that can mean you'll pay a lower annual percentage rate over the life of the loan. You may also have more room to negotiate on fees.

As a benchmark to where you stand, the median credit score on a new mortgage in the second quarter of 2024 was 770, according to the New York Federal Reserve.

Read more: The credit score needed to buy a house in 2024

A primary financial metric lenders will use to determine your creditworthiness is your debt-to-income ratio.

Fannie Mae, a government-sponsored entity that provides liquidity to the home loan market, looks for a maximum total DTI ratio of 36% of "the borrower’s stable monthly income." Exceptions can allow for total DTIs up to 50%, but it's usually best to avoid working on the edges of qualification if you can.

You can calculate your DTI by dividing your total recurring monthly debt by your gross (before taxes and other deductions) monthly income.

Include debt such as monthly mortgage payments (or rent), real estate taxes, and homeowner's insurance. Also, add any car payments, student loans, and the monthly minimum due on credit cards. Remember any personal loan payments and child support or alimony.

Do not include debt such as monthly utilities — like electricity, water, garbage, or gas bills — or car insurance, television streaming subscriptions, or cell phone bills. You can also exclude health insurance costs and miscellaneous expenses such as groceries or entertainment.

Having a cash cushion in the form of emergency savings shows lenders that you are prepared for the unexpected. Of course, that savings account should also include …

A large chunk of your savings account should be dedicated to the down payment. A minimum of 3% down is required in order to qualify for a conventional loan targeted to first-time home buyers — or ideally, 20% to avoid private mortgage insurance. Yes, zero-down options exist if you are eligible for a VA- or USDA-backed loan.

According to Realtor.com, the average down payment in the first quarter of 2024 was 13.6%, with a median of about $26,000.

Buy smart and shop a lot. Relentlessly shop interest rates and mortgage lenders for the best loan offers and justified fees. Get a written preapproval from your lender, then shop for a house you can love and can afford. Your home buying competition is.

According to Zillow, when it comes to first-time buyers versus repeat buyers, first-timers are more likely to reach out to at least three lenders and three real estate agents.

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Mortgage rates tend to fall during economic downturns, so a recession would definitely qualify as a time when rates would likely drop. However, lower rates generally increase demand as more buyers enter the market, so house prices would likely rise. Buying a house at a time when both mortgage rates and home prices are favorable is a challenge. You probably shouldn’t try to time the housing market by waiting for a recession. Buy when it makes sense for you personally.

"Buy now" advocates might say that if you find the right house at the right price — and you're financially set — you should purchase the home now and look to refinance later. But what if mortgage rates don't drop substantially enough to justify a refinance in a few years? Only buy a house when you are comfortable with the terms you can get on closing day.

Locking in a mortgage rate is a short-term decision, generally lasting only 30 to 60 days — sometimes up to six months. There's little reason to agonize over it. Be comfortable with the rate on your Loan Estimate and start packing boxes.

Homes become more affordable as your income and savings grow. Ask any homeowner: Buying that first house was a stretch. The monthly payment loomed large. As months and years go by, it becomes less of an issue. Then, as home prices continue to rise, you're on the right side of the equation: The growing equity builds your net worth.

This article was edited by Laura Grace Tarpley.