The turning point mortgage rate for homebuyers is artificially low

Houses in Centerville, Maryland, United States, on Tuesday, April 4, 2023.

Nathan Howard | bloomberg | Getty Images

Today’s homebuyers are exceptionally sensitive to mortgage rates as home prices soar – and they’ve found their tipping point.

After years of government intervention in the aftermath of the Great Recession and the early years of the Covid-19 pandemic that kept mortgage rates artificially low, today’s buyers have a skewed view of “normal” mortgage rates.

The majority of potential homebuyers, 71%, say they would not accept a 30-year fixed rate mortgage rate of more than 5.5%, according to a March survey from John Burns Research and Consulting. However, the current rate is around 6.4%.

In addition, 62% of buyers said they believed the “normal mortgage rate historically” was less than 5.5%. The rate going back to 1971 is 7.75%, according to Freddie Mac.

“Our advisory team has seen this across the country, noting that homebuilders who choose to subsidize buyers’ mortgage rates, bringing the overall rate down below 5.5%, have had the most success,” said CEO John Burns and Megan Sherlock, senior analyst. Research, in the report, said mortgage purchase rates have fallen to less than 5.0%.

For most buyers, the mortgage rate determines what they can afford, because they generally focus less on the home price and more on the monthly payment; That monthly payment is all about the price.

However, if a lot of potential buyers say they won’t buy unless they get a price below 5.5%, they may be on the sidelines for a while. Mortgage rates have been over 6% for nearly a year and are not expected to drop much this year.

An April survey by US News & World Report seems to support these findings: It found that 66% of Americans planning to buy a home this year said they would wait for prices to drop.

“Mortgage rates are twice as high now than they were a little over a year ago, exacerbating housing affordability challenges ahead of the spring 2023 homebuying season,” Erica Giovanetti, loan expert at US News, wrote in a column discussing the survey. . the findings. “Homebuyers today are very sensitive to interest rate volatility, and a significant drop in mortgage rates is likely to make the market more competitive.”

The US News survey also found that the 25% of homebuyers who are holding on to lower rates are waiting until they fall below 5%. Nearly two-thirds of respondents said they had to cut their housing budgets because of the current level of mortgage rates.

While some buyers can’t afford the home they might want at today’s prices, others choose not to buy simply because they don’t like the idea of ​​a higher price, even if they can afford it. Older consumers are not necessarily more willing to accept higher rates simply because they may have experienced them in the past, according to the John Burns report.

Likewise, potential home sellers find current prices unacceptable, which contributes to an acute shortage of supply in the market. New listings in the four weeks ending April 9 were 25% fewer than in the same week a year earlier, according to Redfin, a real estate brokerage. This continues an eight-month streak of declines.

“Even if the Fed chooses not to raise interest rates next month, which would likely lower mortgage rates, the limited supply of homes for sale will remain a major hurdle for potential buyers,” Daryl Fairweather, chief economist at Redfin, wrote. in the report. “Dropping prices below 6% is likely to get more buyers interested, but enough homeowners have prices in the 3% or 4% range that we’re unlikely to see a significant uptick in new listings.”