When Emily and Jake Cheek started house shopping in Portland, Oregon, last June, interest rates for a 30-year fixed-rate mortgage averaged around 5%. In late August, the couple made an offer on a three-bedroom ranch house with a big backyard, was outbid and took a couple weeks off for vacation.

“When we got back, our realtor sent us an email and was like, ‘Hey, so things are different,’” Emily, 30, said. 

Different, as in bad. Interest rates had shot up to about 6%, and before long, they reached 7%.

“It really did change the monthly payment,” she said. 

The difference in rates added several hundred dollars to the mortgage payment for houses in their price range. The Cheeks kept looking, but the market ground to a halt, said their broker, Brad Twiss, of Neighbors Realty. 

“We did 33 transactions last year, and I don’t think we wrote a single offer in October,” Twiss said. “Almost all of October, rates were over 7.”

In the last couple months, things have changed again. In December, interest rates fell back to around 6% and sales started picking up, Twiss said. He remembers a turning point in early January when one house went on the market and immediately received several offers, even though it was on a very busy street.

“It was a cute house, but that’s a huge objection for a lot of people,” Twiss said. “Then, every weekend since has basically been multiple offers.”

The shift is showing up in national numbers too. In December, pending sales of existing homes rose by 2.5% — the first increase in seven months, according to the National Association of Realtors. The real estate brokerage Redfin recently reported that applications for mortgages and requests for home tours have also risen.

Prices have receded from their peak last spring, according to Redfin Chief Economist Daryl Fairweather, “and because the market’s recalibrated and kind of gotten used to these higher interest rates, buyers are starting to come back.”

The recent drop in interest rates helps, she said.

“Just the fact that they’ve come down from their peak helps with the psychology of buyers to make them feel like they aren’t getting a really raw deal,” Fairweather said. “They’re getting a fine deal right now.”

Research in behavioral economics backs this up, said Ravi Dhar, director of the Yale Center for Customer Insights.

“People assess rates or prices, not in terms of absolute levels — as economists would say — but relative to a reference point.”

Historically speaking, 6% is a pretty low mortgage rate, as anyone who bought a house in the 1980s and ’90s will tell you. But for the past decade, that reference point has been around 4%. And in the first few years of the pandemic, it was about 3%. So when rates jumped to 7%, Dhar said it was a shock. 

“Is 7% too high?” he said. “Actually, it may not be too high in the absolute sense, but it is a lot higher than 4%.”

After a while though, people adapt to a higher reference point. When rates dropped back down to 6%, Dhar said buyers had a different perspective.

“Now, the reference point is not 4 anymore; it’s 7,” he said. “So compared to 7, 6, looks pretty good, right?”

That may be driving some buyers back to the market, but ultimately it comes down to what people can afford, Dhar added.

In Portland, what Emily and Jake Cheek can afford has changed.

“We were originally looking for, you know, the classic three-bedroom, two-bath situation,” Emily said. “Now, it’s looking more like maybe a three-bedroom, one-bath, or a two-bedroom with an unfinished basement.”

The Cheeks are resigned to rates being higher than when they started looking. Maybe they can refinance in the future. Still, “when the rates drop a little bit, it’s superexciting,” Emily said. “It’s more fun to look then.”

Then again, interest rates only matter if you need a mortgage. The last time they put an offer on a house, they lost out to someone paying cash.