Heading into the Home Buying Season – What Would Happen if Rates Dropped to 5%?

As we step into what is usually the beginning of the busiest time of year for homebuyers and sellers (we’re just five weeks from school being out for summer!), the spring housing market is feeling tighter than ever. The main culprits? Low inventory and steady price growth continue to squeeze both affordability—and patience—on both sides of the deal.

If you were on the buying side in March or April, it probably felt like a weekly therapy session with your Loan Officer. Rates were rising and falling with dramatic swings, closely tied to volatility in the bond and stock markets. Locking or not locking a rate while in contract felt more like rolling dice at a craps table than following a rational economic forecast.

In March, existing home sales dropped nearly 6%, erasing gains from February and bringing total resale activity down to a sluggish annual pace of just over 4 million homes. But don’t confuse lower transaction volume with falling home prices—because that’s not the case.
Nationally, this slowdown isn’t just about interest rates remaining stubbornly high—though that’s certainly a hurdle. The bigger issue—and the one keeping many would-be buyers sidelined—is a persistent lack of available homes.

Despite a modest uptick in new listings last month, resale inventory is still far below pre-pandemic norms. That limited supply means buyers are competing over fewer options, which continues to push prices higher. In fact, while price growth has cooled slightly—coming in at a 2.9% annual rate in March—it’s still climbing. And with mortgage rates hovering around 7% again in April, affordability remains at play inside of decision-making.
Meanwhile, sellers aren’t exactly lining up to list either. Many are locked into historically low mortgage rates and are understandably hesitant to swap them for today’s much higher financing costs.

So we’re stuck in a tricky spot—a dynamic that continues to drive a wedge between supply and demand. And until one of those forces meaningfully shifts, this pattern of low inventory and steady price growth is likely to persist.

What could move the needle? Affordability. And there are two main variables in that equation: home price and mortgage rate. If prices aren’t expected to fall significantly, let’s explore what might happen if mortgage rates dropped all the way to 5%.

According to the Mortgage Bankers Association, the average NATIONAL mortgage size on a home purchase so far this year has been $381,921. At a 7% interest rate, that translates to a 30-year fixed monthly payment of $2,541. Drop the rate to 5%, and that payment falls to about $2,050—a nearly $500/month savings, or close to $6,000 a year, back in the homeowner’s pocket.

I plugged this hypothetical scenario into AI and let it digest insights from 30+ sources to build a forecast. Here’s what the supercomputer spit back (I’ll spare you the data rabbit hole—it took a solid 30 minutes to "think"):
• Sales volume could potentially increase by 20%
• Home prices would theoretically rise by about 7%

If that plays out, even with home prices rising—and loan sizes increasing accordingly—the new mortgage would still be more affordable. For instance, a 7% increase in the mortgage amount brings it to $408,655. At 5%, the monthly payment on that loan would be $2,194—still MUCH lower than today’s $2,541 average.

This ChatGPT forecast is just a dart at a dartboard, but the math is very real.
Anecdotally, as someone who worked through the low-rate boom from 2019 to 2021, I can tell you: most buyers weren’t obsessing over price (I know that sounds odd). They were fixated on one thing—payment. If the payment worked, the house worked. If rates drop to 5%, price of the home becomes less important, as the ‘win’ comes in the form of the payment.

Now, I’m not saying this thinking is rational… I’m just saying I saw it happen more times than not, right in front of my own eyes.
Back to reality for a moment, today’s market’s message is clear: don’t expect major bargains this spring. Whether you’re buying or selling, patience—and a solid strategy—are key.

And remember: “hope” is not a homebuying or home-selling strategy.
I’ll leave you with one of my favorite quotes:
“Be fearful when others are greedy, and be greedy when others are fearful.” – Warren Buffett

Just make sure you know which side of this quote you reside when entering this housing market.

* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.