Will a drop in mortgage rates make any difference in San Diego’s housing market?

San Diego County’s home market remains sluggish despite a slight decrease in mortgage rates.

Following a recent home price report, several experts pointed to affordability challenges, instead of the usual suspect of interest rates, as a bigger factor. Namely, that home prices have gone up so much since the pandemic, without corresponding wage increases, that mortgage rates aren’t a gigantic factor.

Lisa Sturtevant, chief economist at Bright MLS, said a change in mortgage rates is likely not enough to jump-start sales activity, which is at record lows. She said an increase in sales would likely come after home inventory greatly increases and sellers adjust price expectations.

On Thursday, the average for a 30-year, fixed-rate mortgage was 6.3%, according to Freddie Mac. That was down from a high of 7.04% in mid-January, but still higher than 6.12% in October 2024.

Question: Will a moderate drop in mortgage rates make much of a difference in San Diego County’s home market?

Economists

David Ely, San Diego State University

NO: Mortgage rates are just one factor prospective homebuyers consider. High home prices are a barrier to renters wishing to purchase. Rising insurance rates have driven up home ownership costs. Those with an exceptionally low rate on their current mortgage will not want to move and take on a more expensive mortgage. Uncertainty due to weakening labor markets and high prices are causing households to question whether they should take on a big mortgage.

Ray Major, economist

NO: Although a slight reduction in mortgage rates might make a few people who are on the margin able to purchase a house, almost 80% of the residence of San Diego who have a mortgage have a rate that is below 6% with many having mortgages in the 3% to 4% range. These people who are the potential buyer pool will not re-enter the housing market until rates fall another two points, or when housing prices fall significantly.

Caroline Freund, UC San Diego School of Global Policy and Strategy

NO: It will take more than a moderate drop in mortgage rates to change behavior. People don’t like to sell at a loss, so inventory remains limited. Despite limited supply, housing prices are down in San Diego, indicating that demand is weak. Meanwhile, economic uncertainty and rising unemployment are making people more cautious about taking on debt.

Kelly Cunningham, San Diego Institute for Economic Research

NO: Monthly mortgage payment is the critical factor of affordability for most homebuyers. The moderate drop in mortgage rates is unlikely to significantly impact the housing market as prices have risen far faster than wages. San Diego’s population growth has also been comparatively low the past six years, relieving some pressures on housing demand. Unless inventory increases and sellers are compelled to reduce their expectations for prices, sales activity will likely continue to be low.

Alan Gin, University of San Diego

NO: The average home price in San Diego is so high that even a modest drop in interest rates is not going to make the homes affordable. It will reduce the monthly payment, maybe by a large amount. But even that reduced level will be beyond the reach of most working-class San Diegans. And a reduction in the interest rate does not reduce the amount needed for a down payment. Finally, lower interest rates might increase the demand for housing, which would boost prices even higher.

James Hamilton, UC San Diego

YES: Mortgage rates are a key factor in the affordability of monthly payments for most borrowers. Although there was a brief period last fall when rates were lower, for most of the past three years rates have been somewhat higher than they are today. There are other factors that are also holding housing back. But lower mortgage rates are a step in the right direction, and I hope to see more cuts in the next few months.

Norm Miller, University of San Diego

NO: California homeowners are smart and most of those with mortgages (66%) have rates below 5%. Many existing borrowers are locked-in and will remain so until we drop below 5.5%. Prices are falling in some lower-priced markets, but our supply-constrained county has very little that fits into this bucket. Keep in mind sales will still occur, driven by non-financial reasons (death, birth, job moves) and that the upper end of the market is helped by a positive stock market.

Executives

Phil Blair, Manpower

YES: A moderate rate drop, finally, would have a significant effect on the housing market. It will allow a whole new batch of buyers to enter or re-enter the market and finally there is a substantial array of housing for sale beginning to open up. There is new product on the market and older homeowners are finally going to be able to downsize. Something they have wanted to do for a while but their new purchase interest rate would have been too high.

Austin Neudecker, Weave Growth

NO: The primary challenge facing homebuyers is affordability. San Diegans’ average annual wage is not increasing as quickly as the average price of homes, especially given the limited supply of homes for sale. A slight decrease in mortgage rates may spark additional demand, but it is unlikely to change the supply. Furthermore, if the Fed is pressured to pursue substantial rate cuts next year, I anticipate even higher prices.

Chris Van Gorder, Scripps Health

NO: I think the slowdown in sales is multifactorial. Interest rates are still high. Prices remain high due to supply and demand. There are rising employment concerns. The federal shutdown is an issue because we have many government employees in San Diego. And potential buyers are likely concerned about rising health insurance premiums if the ACA subsidies are not continued. All of this creates economic anxiety that will impact home sales.

Gary London, London Moeder Advisors

NO: Other pressing factors affecting housing affordability include the possibility that the U.S. may be entering a period of “stagflation” (inflation plus weakening economy), and housing prices are likely to stay mostly flat as there is low availability of resale homes and few additions to inventory. While mortgage rates are trending down, these slightly lower rates are insufficient to buck these other trends.

Not participating this week: 

Jamie Moraga, Franklin RevereBob Rauch, R.A. Rauch & Associates

Have an idea for an Econometer question? Email me at phillip.molnar@sduniontribune.com. Follow me on Threads: @phillip020