The average U.S. home currently costs $360,727 according to Zillow, but that number could climb significantly if mortgage rates drop to 5% in 2026. While most forecasters predict rates ending next year around 5.9% to 6%, even that modest decline could unlock major buyer demand — and push prices higher than current projections suggest.
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Here’s the math on what 5% mortgage rates could mean for home values.
The Affordability Threshold
The National Association of Realtors calculated that if mortgage rates drop to just 6%, approximately 5.5 million additional households — including 1.6 million renters — would suddenly be able to afford a median-priced home. About 10% of those newly qualified households, or 550,000 buyers, would likely purchase within 12 to 18 months of rates hitting that level.
That’s at 6%. Drop rates to 5% and the affordability equation shifts even more dramatically. Every reduction in mortgage rates puts more buyers within reach of homeownership, expanding the pool of qualified purchasers competing for available homes.
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NAR’s Current Projections
NAR Chief Economist Lawrence Yun is already forecasting a 4% increase in home prices for 2026, with rates averaging around 6%. That would put the average home price at approximately $375,156 by the end of next year — up from today’s $360,727.
But that 4% projection assumes rates stay near 6%. If rates dropped to 5% instead, the surge in buyer demand would likely push prices higher than 4%.
Calculating the 5% Scenario
Starting with the current $360,727 average, here’s how different rate scenarios could play out:
At 6% mortgage rates (NAR’s base forecast):
- Home price increase: 4%
- Price gain: $14,429
- New average home price for 2026: $375,156
At 5% mortgage rates (below most forecasts):
The exact price impact depends on how much additional demand materializes. Historical patterns show that every 1% drop in mortgage rates typically brings millions more buyers into the market. With 5.5 million households qualifying at 6%, dropping to 5% could add several million more.
If we conservatively estimate that 5% rates bring 15%-20% more buyers than 6% rates (rather than the 4% NAR predicts), prices could rise 6%-7% instead of 4%. That would put the average home price between $383,170 and $385,978 — an increase of $22,443 to $25,251 from today’s levels.
The Demand Surge Effect
The relationship between mortgage rates and home prices isn’t perfectly linear, but the pattern is clear: lower rates increase affordability, which increases demand, which pushes prices higher when inventory remains constrained.
NAR’s forecast already anticipates a 14% jump in home sales in 2026 with rates at 6%. If rates dropped to 5%, sales could surge even higher as sidelined buyers rush back into the market.
Yun emphasized that “home prices nationwide are in no danger of declining” even at 6% rates. Supply shortages persist across most markets, meaning more buyers competing for limited inventory naturally drives prices upward.
The Monthly Payment Reality
A $300,000 mortgage at 6% costs approximately $1,799 monthly for principal and interest. At 5%, that same loan drops to roughly $1,610 monthly — a savings of $189 per month or $2,268 annually.
That payment reduction allows buyers to afford more expensive homes while keeping monthly costs constant. Someone budgeting $1,800 monthly could afford a $300,000 home at 6% or a $335,000 home at 5% — an 11.7% increase in purchasing power from a single%age point drop in rates.
When millions of buyers simultaneously gain that extra purchasing power, they bid up home prices accordingly.
What This Means for Buyers and Sellers
If rates somehow dropped to 5% in 2026:
Buyers would face increased competition and likely higher prices than NAR’s current 4% projection. The monthly payment savings from lower rates would be partially offset by paying more for the home itself.
Sellers would benefit from stronger demand and could command higher prices, especially in supply-constrained markets. The “rate-lock” effect keeping homeowners from listing might ease as their existing low rates become less valuable compared to new 5% mortgages.
Investors would see continued appreciation in real estate values as affordability improvements drive demand without sufficient inventory increases to match.
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This article originally appeared on GOBankingRates.com: If Mortgage Rates Drop to 5% in 2026, Average Home Prices Could Jump This Much
