Why a 5.5% Mortgage Rate Could Be the Key to Reviving the Housing Market
Mortgage rates have become a key driver in today’s housing market, as homebuyers show high sensitivity to even slight changes in rates. Over the past year, rising rates have cooled demand and slowed home sales, while temporary rate drops have seen buyer interest surge. New research from John Burns Research and Consulting suggests that the magic mortgage rate to revive the market may be around 5.5%, marking a significant threshold for buyer affordability.
In the past year, mortgage rates soared to over 7%, a high not seen in recent years, before easing slightly to around 6.27% as of the latest data. This significant jump in rates has left many existing homeowners reluctant to sell, as they are locked into historically low mortgage rates secured over the past few years. This reluctance to reenter the market at higher rates has kept inventory levels low, squeezing potential buyers looking for options. As a result, the market has seen reduced activity, with more than half of surveyed homeowners and renters expressing that now is not an ideal time to buy, citing high mortgage costs as a barrier.
The study highlights that 5.5% seems to be the tipping point for many consumers. A majority of survey respondents indicated they would not consider purchasing a home if mortgage rates were above this rate. Nearly two-thirds of consumers also believe a “normal” mortgage rate should be below 5.5%, even though historical averages suggest otherwise. Since 1971, mortgage rates have averaged around 7.75%, peaking at 18.83% in the early 1980s and reaching record lows of 2.65% in 2021.
This consumer hesitation has encouraged homebuilders to offer rate buydowns, often covering up to 6% of the mortgage amount to reduce rates closer to the 5% mark. Builders find that subsidizing mortgage rates significantly increases buyer interest, allowing them to move inventory despite a general market slowdown. This strategy has proven successful as builders benefit from the lack of inventory in the existing home market, with the low supply pushing more buyers toward new constructions.
However, despite these efforts, the mortgage rate forecasts for the rest of 2023 are not optimistic about returning to 5.5%. Experts at the Mortgage Bankers Association and Wells Fargo predict rates will stay slightly above 6% through the second quarter, while Fannie Mae and the National Association of Home Builders anticipate rates even closer to 6.6%.
With no immediate expectation of rates dropping to 5.5%, potential homebuyers may continue to hesitate, and sellers may stay put with their low-rate loans. This persistent divide in expectations underscores how critical mortgage rates are to market dynamics, as buyers and sellers alike remain cautious amid ongoing rate uncertainty. For now, the rate-sensitive housing market looks poised to remain sluggish, with lower rates the key to unlocking greater activity and demand in the months ahead.