How Do Lower Mortgage Rates Affect Your Buying Power?

In an effort to contain the economic damage inflicted by the coronavirus pandemic, the Federal Reserve in March slashed interest rates by half a percentage point — its largest one-time cut since the 2008 financial crisis. In theory, that should encourage banks to offer lower mortgage rates and bring more expensive homes within reach of more buyers. But it doesn’t always work that way.

To see how lower mortgage rates play out in the property market, a recent study by Redfin explored the fluctuation of purchasing power in cities around the country by comparing the first week of March 2019, when mortgage rates were 4.41 percent, to the first week in March 2020, when they were 3.2 percent — an all-time low. While lower rates make more expensive homes available at a lower monthly payment, the study found that in most cities, they also effectively reduce the number of homes for sale overall, increasing competition for buyers.

The Fed’s rate cuts apply to what banks pay to borrow, which usually translates into lower mortgage rates for their customers. But those rates had already been falling for a year before the most recent cut, leading many owners to refinance existing loans, and reducing the capacity of lenders to handle new ones. Overburdened lenders have actually raised 30-year rates to tamp down demand.

The pandemic has caused other uncertainties for all parties. Lenders are facing a more complex process in qualifying borrowers who are now vulnerable to job loss or reduced profits. Industry professionals, buyers and sellers are struggling with the difficulties that social distancing has brought to showings, inspections and closings. And title searches, essential to home sales, can’t always be processed because government recording offices have been closed in many states.

In light of all that, this week’s chart can help you understand what price you can afford, based on lower mortgage rates, when the time to buy seems right.