Mortgage rates are falling. How far will they go?

For many prospective homebuyers, the last two years have been brutal as high home prices and mortgage rates produced the most unaffordable housing market since the 2000s bubble.

Many experts don’t expect drastic improvement soon, but a shift could finally be underway.

The cost of a 30-year fixed mortgage has fallen from above 7% in May to the low-6% range as of last week. On Wednesday, the Federal Reserve is expected to cut its benchmark interest rate for the first time since it began raising it in 2022 in a bid to fight inflation.

“I think for the next two years, we are in a world where the pressure is on rates to come down,” said Daryl Fairweather, chief economist with real estate brokerage Redfin.

How much mortgage rates will decline is unclear.

The cost for a mortgage is heavily influenced by inflation because institutional investors that buy 30-year mortgages that are packed into bundles don’t want to see the value of their investment eaten away.

Experts attribute the recent decline in mortgage rates to easing inflation, as well as expectations that because consumer prices are rising less, that will enable the Fed to cut its benchmark interest rate.

The central bank’s federal funds rate does not directly affect mortgage rates, but it can do so indirectly since it sets a floor on all borrowing costs and provides a signal of how entrenched the Fed thinks inflation is.

Keith Gumbinger, vice president of research firm HSH.com, said a Fed cut Wednesday may not move mortgage rates much because, to some extent, mortgage investors have already priced in the expectation that rates would decline.

More cuts, however, are expected in the future.

Gumbinger said if the Fed achieves a so-called soft landing — taming inflation without causing a recession — he would expect mortgage rates to be in the mid-5% range by this time next year.

If the economy turns sour, mortgage rates could fall further, though even in that scenario Gumbinger doubted they’d reach the 3% and below range of the pandemic.

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Orphe Divounguy, a senior economist with Zillow, predicted that rates would not even fall to 5.5% but would stay around where they are, arguing that the economy is relatively strong and inflation is unlikely to ease much.

“I don’t think we are going to see a huge drop, but what we have seen has been great for homebuyers so far,” he said.

Indeed, even modest drops in borrowing costs can have a big effect on affordability.

If a buyer puts 20% down on an $800,000 house, the monthly principal and interest payments would equal $4,258 with a 7% mortgage; $3,837 with a 6% mortgage; and $3,436 with a 5% mortgage.

Whether dropping rates bring lasting relief is another question. Falling borrowing costs could attract a flood of additional buyers and send home prices higher — especially if increased demand isn’t met by an increase in supply.

For now, the number of homes for sale is increasing modestly, rates are falling and home price growth is slowing.

In August, home prices across Southern California dipped slightly from the prior month. Values were still up nearly 6% from a year earlier, but that was smaller than the 12-month increase of 9.5% in April, according to data from Zillow.

In theory, this combination of factors could provide prospective buyers an opportunity to get into the market. Many don’t appear to be doing so.

According to Redfin, 7.8% fewer homes across the U.S. went into escrow during the four weeks that ended Sept 8 compared with a year earlier.

In Los Angeles County, pending sales were up 2% from a year ago but down from earlier in the summer.

Fairweather said buyers might not be jumping in now because they haven’t realized rates have gone down or they are temporarily scared off by recent changes to real estate commission rules.

Some agents say they are noticing a pickup.

Costanza Genoese-Zerbi, an L.A.-area Redfin agent, said she’s recently noticed more first-time buyers out shopping, leading to an uptick in multiple offers in entry-level neighborhoods where people are more sensitive to rates.

Other agents aren’t seeing much of a boost.

Real estate agent Jake Sullivan, who specializes in the South Bay and San Pedro, has a theory: Homes are still far more expensive than they were just a few years ago.

Home insurance costs have risen as well.

“The cost of living is just so high,” Sullivan said.