Why Waiting for 5% Mortgages Costs More Than Buying at 6%

Mortgage rates around 6% look expensive compared to 2021, but that comparison is irrelevant. The real question is whether the gradual normalization happening now—spread compression, fading lock-in, wages finally growing faster than prices—creates better odds than waiting for a sharper drop that might not come. The mechanics suggest that people who can carry today's payments and plan to stay put are locking in the top of a slow descent, with refinancing as a backstop if rates fall further.

Rates have dropped from the 7% range in early 2025 to roughly 6% now. That's real relief, but it's still double what people paid during the pandemic. The bigger shift is happening in who holds what. More households now carry mortgages above 6% than below 3%, which is the first time the lock-in effect has actually started to break. Inventory is up between 9% and 26% year-over-year depending on the market, though it's still below where things were before COVID.

Payments as a share of income peaked at 38% in late 2023. They're down to 33% now, which is better but nowhere near the 23-27% range that held for years before the pandemic. The improvement comes from prices growing slower, rates falling a bit, and wages climbing. But the ratio is still structurally high. The market isn't collapsing or surging anymore. It's just grinding toward something closer to normal, and different parts are moving at different speeds.

Mortgage rates come from two things: the 10-year Treasury yield and the spread that investors demand to hold mortgage bonds instead of Treasuries. That spread has averaged 176 basis points since 1972. It blew out to 296 basis points in mid-2023 when the Fed stopped buying bonds and the market got volatile. It's back down to around 205 now.

The administration told Fannie and Freddie to buy $200 billion in mortgage bonds to push that spread tighter. They'd already started buying late last year and added about $70 billion. The new directive doubles that. When they buy bonds, prices go up and yields go down, which flows through to the rates lenders offer. The Fed did this from 2008 to 2022 and held $2.7 trillion in mortgage securities. Rates fell. When the Fed stopped in 2022, spreads widened and rates jumped.

The difference is scale. Fannie and Freddie are buying $200 billion in a $9 trillion market. They're capped at $225 billion each by law, so they're basically maxing out. This might compress spreads another 30 to 50 basis points if they move fast, but it's not the same as the Fed stepping in. It's a one-time push, not a sustained program.

The lock-in dynamic works differently. Someone with a $500,000 mortgage at 3% pays $2,108 a month. At 6%, it's $2,998. That's a 42% jump, which kept millions of people from selling even when they wanted to move. But now more people have mortgages originated in the past couple years at higher rates, so the penalty for moving is smaller. Divorces, job changes, kids, retirement—life happens, and the math is starting to matter less than it did.

The story right now is that rates are falling and affordability is improving, so buyers should jump in. That's not wrong, but it's incomplete. Rates are down, sure, but they're still high relative to where they were and where the spread to Treasuries should be. Affordability is better than 2023, but payments still eat more of your income than they have for most of the past 20 years.

The GSE bond-buying helps with the spread, but it doesn't fix the underlying problem that houses cost too much relative to what people earn. If the spread compresses 50 basis points, a $500,000 mortgage gets cheaper by about $150 a month. That's real money, but it's still 35% more expensive than it was at 3%. And once Fannie and Freddie hit their caps, further compression depends on private buyers stepping back into the market, which hasn't happened yet.

The other piece is inventory. As the lock-in fades, more homes should hit the market. If demand doesn't keep up, prices could soften. Most forecasts see 1-2% price growth this year, with some markets going negative. Whether that happens depends on rates staying low enough to bring buyers back in numbers that match the new supply.

If wages keep growing faster than prices for a few years, affordability will improve even if prices don't fall. That would be the first sustained stretch of income gains beating price gains since the financial crisis. But it's gradual. There's no single moment where things flip back to 2019.

Buying now with a 6% rate also creates a refinance option if rates drop further. You're essentially setting a ceiling, not a floor. If rates fall to 5.5% or lower, you can refinance. If they don't, you're stuck with 6% unless you sell. Either way, you're paying to own rather than rent, accumulating equity, and locking in fixed housing costs while rents keep climbing.

The composition of inventory matters too. Homes coming from people with newer, higher-rate mortgages might skew toward entry-level properties held for shorter periods. That could ease competition at the bottom of the market. Higher-end inventory might stay tight if older owners with low rates and lots of equity still don't want to move.

Waiting has costs. If prices go up 2% and rents go up 3%, someone who waits a year pays more for the house and burns another year of rent. The question is whether you think rates or prices will drop enough to offset that.

The GSE program is capped by law. If they can't expand past $225 billion each, the buying stops, and spread compression stalls. The program could also conflict with the Fed if inflation stays sticky and the central bank holds rates higher while the administration tries to push mortgage rates down. That would create weird crosscurrents in the bond market.

The lock-in might not fade as fast as people think. Plenty of homeowners still have sub-4% mortgages, and for them the payment shock is still brutal. If enough of them stay put, inventory growth could slow and keep prices firm.

Lower rates could also backfire. If the GSEs push rates into the mid-5s, demand might spike and drive prices higher, especially if supply is still limited. You'd end up with cheaper financing but more expensive houses, which doesn't necessarily help affordability.

A recession would change everything. If unemployment climbs or the economy weakens, housing demand falls no matter what rates do. Prices would likely soften, but incomes would take a hit too, so the net effect on affordability is unclear.

And national trends don't tell you much about specific markets. Parts of the Midwest and South are already close to pre-pandemic affordability. Coastal cities and the Northeast are nowhere near that. Local dynamics matter more than the averages.

The decision isn't about whether 6% is a good rate. It's not, relative to history. The decision is about whether the opportunity cost of waiting—rent, foregone equity, potential price increases—outweighs the chance that rates or prices fall enough to make waiting worth it.

The GSE intervention is real but limited. The lock-in is fading but not gone. Income growth is outpacing price growth for the first time in years, but it's happening slowly. The market is normalizing, not reverting. There's no clean entry point where everything lines up perfectly.

People who can manage the payment at 6% and plan to hold for years are locking in near the top of a gradual decline, with refinancing as a fallback. People waiting for 4% or a 20% price drop are waiting for conditions that probably aren't coming back anytime soon. The mechanics don't point to a discrete moment of maximum advantage. They point to a slow grind where the earlier you enter, the more of the eventual recovery you capture, but only if you can carry the cost in the interim.

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This analysis is for educational purposes. It does not constitute investment advice or a recommendation to buy or sell any security. Investors should conduct their own due diligence and consult financial advisors.

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