Yes, mortgage rates are coming down, just not enough yet

2023 has been a tough year to be a home buyer or a home seller. 

The first problem has been high prices in many markets for homes owned by Baby Boomers paying 4% or lower on their mortgages,

The second problem has been that many buyers can't afford the combination of those higher prices and higher mortgage rates. 

The unhappy result has been that home sales have been falling since the Federal Reserve started raising rates in early 2022: about 33% for sales of existing homes at the end of 2020 and 30% for newly constructed homes.

There is some better news to report on this front, however. 

Mortgage rates have started to come down as the Fed has stopped raising rates. A rate on a 30-year fixed-rate loan has fallen from about 8% at the end of October to about 7.1% for a 30-year fixed-rate loan as of Dec. 1, according to Mortgage News Daily. 

(A note: Freddie Mac, one of the giants in the home-financing business, estimated the 30-year rate at 7.22% in its Nov. 29 weekly report on rates. The report is published on on Thursdays. You can find it here.)  

While this sounds nice, the reality of buying a home remains daunting.

The median price of a U.S. home is about $440,000. If you buy a home with a 20% downpayment of $352,000 and an 8% mortgage, the monthly payment would be $2,582 (plus taxes and insurance).

Drop the rate to 7%, and the payment falls to $2,309, a monthly of savings of $270. At 6%, the payment is $2,071, saving you an eye-catching $485 a month, more than $5,800 a year. A 5% loan (or close to it) would be a dream. The last time mortgage rates were that low was in the summer of 2022.

Related: Dave Ramsey says it's time to buy a house; mortgage rates decline

The question is daunting from the seller's point of view. If you own your home and want to trade up or, say, move to the mountains, rates may be too high in the current environment, even at 7%, to find buyers who can swing the deal. 

There's an additional problem, especially if you're an owner with a 4% mortgage. Can you afford another house after selling the first one? 

This helps explains why there's a huge problem of lack of inventory in the U.S. housing market. Buyers can't cope with high rates, and not enough owners want to or can afford to sell, and existing home sales typically represent upwards of 90% of all residential sales.

Build more houses

An obvious solution: Build more houses. 

Small builders, however, don't have the time or the cash to finance the building of new dwelling units to meet the intense demand. 

Big builders of single-family homes and/or apartments who have relationships with lenders willing to help buyers finance their homes can sell all the homes they want. If there's enough land to do it. 

Plus, getting a subdivision platted or an apartment building permitted is time-consuming and expensive.

Meanwhile, buyer and sellers face a new sort of competitor: Investor groups are buying up all the single-family homes they can. A Jeff Bezos-backed fund is a new entrant into the business.

There are winners in this quandary: builders and their stockholders. Shares of PulteGroup  (PHM) - Get Free Report, one of the biggest U.S. homebuilders, jumped 19.6% in November and are up more than 90% this year. The iShares U.S. Home Construction ETF  (ITB) - Get Free Report, which includes the biggest builders, closed Friday just below its 52-week high and up 47% on the year. 

The bottom line is this: Americans love home ownership. The tax code and a 30-year mortgage rewards that love. It helps families build wealth over time. 

So keep hoping rates keep coming down and prices remain steady. The numbers probably really make sense if mortgage rates drop to 5%. 

That would also mean the Federal Reserve has declared victory over inflation and gone home.