Rates or Prices? Which Need to Drop to Make Housing Affordable?

If you’re thinking about buying a house in 2025, you’re likely hoping for some kind of relief to make the purchase feel a bit easier on your bank account. Eighty-three percent of U.S. adults who don’t own a home but want to point to issues with money — primarily not having enough income, home prices being too high and/or not being able to afford a down payment — as the driving reason for continuing to rent, according to Bankrate’s latest Home Affordability Report.

So, what’s on the horizon? Will mortgage rates that have been hovering in the 6.5 to 7 percent range begin to fall? Will home prices drop, too? Read on to learn about what’s in store for the housing market and what might make buying a home a bit easier.

Home prices vs. mortgage rates — which one matters more?

When comparing home prices and mortgage rates, it’s easy to focus on the listing amount since that’s the number you see first. However, the mortgage rate you lock in ultimately matters more since you could be paying off the loan for the next 30 years.

Let’s look at some math based on the median price of a home in the U.S. — $422,400 in July 2025, according to the National Association of Realtors.

In the example above, buying a house with a mortgage rate that is one-half point lower translates to a monthly payment that is $109 lower. Meanwhile, a 1 percent decrease in the price of the home ($4,224) only saves around $21 per month.

Now, let’s look at a more dramatic decrease in both rates and prices:

Even if the median price of a home dropped by more than 5 percent, the monthly payment would still be over $100 more expensive compared to buying at the current median price with a mortgage rate that’s a full percentage point lower.

Are rates going to drop?

The good news: Mortgage rates have already fallen. Bankrate’s mortgage rate data shows that, after starting the year above the 7 percent mark, 30-year mortgage rate averages were closer to 6.64 percent in August. The better news: They’ll likely fall even further.

“Almost every mortgage forecast predicts that mortgage rates will fall between now and the end of this year, then continue through next year,” says Darren Tooley, senior loan officer at Cornerstone Financial Services in Michigan.

However, Tooley points out that there is no clear consensus on how far or fast those rates will drop. Fannie Mae’s latest forecast expects 30-year mortgage rates to end 2026 at 6.1 percent. The Mortgage Bankers Association, on the other hand, predicts a more modest drop with mortgage rates staying at 6.5 percent for all of next year.

While declining rates can lower your borrowing costs, they can create a challenge, too.

“I believe that as we see rates come down further, the move will get the attention of the public at-large and reignite interest in real estate,” says Evan Luchaco, a home loan specialist with Churchill Mortgage. “With growing interest comes great demand, which inevitably leads toward competition and increasing home prices.”

Could prices drop soon, too?

Prices aren’t quite as simple. Historically, home values go up over time except in unprecedented scenarios and times of economic uncertainty, like the 2008 housing crisis. And while Zillow’s most recent forecast calls for home values to close the year 0.9 percent lower, the story will look different around the country.

“We have seen record increases in home values over the past five years, but some have exploded way beyond their affordability ceiling,” Tooley says. “In these boom markets, the payment shock has thinned demand, so, logically, value will be flat or even falling for a short period of time.”

There are plenty of places where prices have already seen modest declines. In Jacksonville, Florida, for example, the median home price declined 2.3 percent year-over-year in July, according to Redfin. In Atlanta, the median sale price dropped 8.8 percent over the last year, per Redfin.

Learn more: When are home prices going to fall — and how far?

Why is housing so unaffordable right now?

What affects housing affordability? The biggest factor is one of the foundational principles of economics: supply and demand. Based on a recent Zillow analysis, the U.S. has a housing shortage of 4.7 million units. More people want homes than are available, which naturally drives up the price. However, the housing shortage has been around for a while. Other critical pieces of the housing affordability puzzle include:

• The pandemic: Sure, the pandemic may be over, but the record-low rates fueled a surge in prices in many parts of the country. From the second quarter of 2020 to the end of 2022, the median sale price rose nearly 40 percent, according to data from the U.S. Census Bureau and U.S. Department of Housing and Urban Development.
• Inflation: While the Federal Reserve doesn’t directly set mortgage rates, its policy does have a tremendous impact on borrowing costs. Since the Fed has been working to tame inflation, rates have been higher. So, homebuyers are dealing with high listing prices coupled with high mortgage rates.
• Sluggish wage growth: While just about everything — including housing — costs more, people aren’t seeing their take-home pay increase at the same pace. The most recent analysis from the U.S. Bureau of Labor Statistics shows that workers saw an increase of 1.4 percent in their average weekly earnings.

Learn more: How do interest rates affect home prices and the housing market?

How much should I spend on a home?

Affording a home requires a budget. Before you begin looking at listings, consider the 28/36 rule in guiding your math. Most experts agree that you should aim to spend no more than 28 percent of your monthly income on your housing costs, which include principal and interest and other expenses like property taxes and homeowners insurance. With that in mind, if you earn $7,000 per month, your housing costs should be $1,960 per month or less.

The “36” in the equation represents the total percentage of your income that should go toward all your debts, such as your mortgage, car payment and student loans.

How can I make owning a home more affordable?

If you’re trying to figure out whether to buy a house or wait, it’s often wiser to wait if you’re worried about stretching yourself thin financially. While you’re working to build a budget that feels more comfortable, consider these tips:

• Boost your credit as much as possible: Instead of focusing on hitting the minimum credit score to qualify for a mortgage, aim as high as possible. Lenders tend to reserve the lowest interest rates — which are going to save you the most money — for borrowers with excellent credit. The closer you can get to 780 or above, the better off you’ll be.
• Look for down payment assistance programs: If you’re a first-time homebuyer, there are quite a few options that are designed to help you come up with the upfront funds you need. If you can eliminate the worries of saving more for a down payment, you may be able to focus on the first tip even more by allocating a greater chunk of your income to pay off credit cards or other debts.
• Cast a wide net with your search: In addition to your own finances, think carefully about what you really need in a home. Condos and townhomes are often much smaller than single-family homes, but they tend to have much lower listing prices, too. Additionally, consider whether you’re open to dealing with a fixer-upper. While you may need to make some updates, the entry price point can be much better for a tight budget.

FAQs

• Should I wait for interest rates to drop before buying a house?
  

  While getting a lower rate is certainly appealing, you may be better off buying a home now to avoid the potential for a rush of competition when rates do decline. Forty percent of buyers say they would be more comfortable buying a home this year with a rate of less than 6 percent, according to Bankrate’s Mortgage Rates Sentiment Survey. Rather than waiting, it may be wise to buy a home now and keep a close eye on the right time to refinance.

• How much does a 1 percent change in interest rate affect my payment?
  

  A 1 percent decline in your interest rate translates to a significant amount of savings on your monthly mortgage payment. For example, buying a $500,000 home with a 30-year mortgage loan at a rate of 6 percent is more than $260 cheaper each month than a loan with a 7 percent interest rate, assuming you make a down payment of 20 percent.

• What salary do I need to afford a $500K home?
  

  Here’s a starting benchmark for being able to afford a $500,000 home: $91,000. Based on that amount, you could afford the principal and interest on a 30-year mortgage with a 6.5 percent interest rate, assuming you make a 20 percent down payment. If you’re putting down much less, you’re going to need to make much more. Ultimately, the answer varies based on how much you’re planning to put down and how much you’ll need to spend on other obligations like property taxes and insurance.