The Tipping Point for Homebuyer Mortgage Rates Is Artificially Low

Today’s homebuyers are exceptionally sensitive to mortgage rates with house prices so high – and they’ve found their tipping point.

After years of government intervention following 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 what mortgage rates are “normal”.

The majority of potential buyers, 71%, say they will not accept a 30-year fixed mortgage rate above 5.5%, according to a March survey by John Burns Research and Consulting. The current rate, however, is around 6.4%.

Additionally, 62% of buyers said they believed a “historically normal mortgage rate” was below 5.5%. The average dating back to 1971 is 7.75%, according to Freddie Mac.

“Our team of consultants have witnessed this across the country, noting that homebuilders who choose to subsidize buyers’ mortgage rates, bringing the overall rate below 5.5%, have had the most success. Good many of the nation’s largest builders have been buying mortgage rates below 5.0%,” CEO John Burns and senior research analyst Maegan Sherlock said in the report.

For most buyers, the mortgage rate determines what they can afford, as they typically focus less on the price of the house and more on the monthly payment; this monthly payment is all about the rate.

However, if so many potential buyers say they won’t buy unless they get a rate below 5.5%, they may be on the sidelines for a while. Mortgage rates have been above 6% for almost a year and are not expected to drop much this year.

An April survey from US News and World Report seemed to support these findings: it found that 66% of Americans planning to buy a home this year said they were waiting for rates to come down.

“Mortgage rates are about twice as high now as they were just over a year ago, which has exacerbated housing affordability issues ahead of the homebuying season. in the spring of 2023,” Erika Giovanetti, loan expert at US News, wrote in a column discussing the investigation. results. “Homebuyers today are extremely sensitive to interest rate fluctuations, and a significant drop in mortgage rates would likely make the market more competitive.”

The US News survey also found that 25% of homebuyers waiting for lower rates are waiting for them to drop below 5%. Nearly two-thirds of respondents said they had to cut their housing budget because of the current level of mortgage rates.

While some buyers cannot afford the home they want at current prices, others choose not to buy simply because they don’t like the idea of ​​a higher price. even if they can afford it. According to John Burns’ report, older consumers are not necessarily more willing to accept higher tariffs simply because they have experienced them in the past.

Likewise, potential home sellers find the current rates unacceptable, contributing to the severe shortage of supply in the market. New listings in the four weeks to April 9 were 25% lower than in the same week a year earlier, according to Redfin, a real estate agency. This continues an eight-month streak of double-digit 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 would remain a major barrier for potential buyers,” Daryl Fairweather wrote. , chief economist at Redfin, in the report. “Rates dropping below 6% would likely pique the interest of more buyers, but enough homeowners have rates in the 3% or 4% range that it is unlikely that we We are seeing a surge in new registrations.”