Homebuyers’ mortgage rate tipping point is artificially low

Homebuyers' mortgage rate tipping point is artificially low

Houses in Centreville, Maryland, U.S., on Tuesday, April 4, 2023.

Nathan Howard | Bloomberg | Getty Images

Today’s homebuyers are extraordinarily sensitive to mortgage rates at such high home prices — and they’ve found their tipping point.

After years of government intervention after the Great Recession and the early years of the Covid-19 pandemic that kept mortgage rates artificially low, today’s buyers have a distorted idea of ​​what “normal” mortgage rates are.

According to a March survey by John Burns Research and Consulting, the majority of prospective home buyers, 71%, say they will not accept 30-year fixed mortgage rates above 5.5%. However, the current rate is around 6.4%.

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

“Our advisory team has been monitoring this across the country and has found that homebuilders who choose to subsidize buyers’ mortgage rates and bring the overall rate below 5.5% have had the most success. Many of the country’s largest homebuilders have been buying mortgage rates below 5.0%,” CEO John Burns and Maegan Sherlock, a senior research analyst, said in the report.

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

However, with so many potential buyers saying they’ll only buy if they get a rate below 5.5%, they might be sitting on the sidelines for a while. Mortgage rates have been above 6% for almost a year and are not expected to move much lower this year.

An April poll by US News and World Report seems to confirm these findings: It found that 66% of Americans planning to buy a home this year said they would wait for interest rates to fall.

“Mortgage rates are now about double what they were a little over a year ago, which has exacerbated housing affordability challenges ahead of the spring 2023 homebuying season,” wrote Erika Giovanetti, credit expert at US News, in a column about the survey results . “Today’s homebuyers are extremely sensitive to fluctuating interest rates, and a significant drop in mortgage rates would likely make the market more competitive.”

The US News poll also found that 25% of homebuyers waiting for lower interest rates are waiting until they drop below 5%. Almost two-thirds of those surveyed said they had to reduce their housing budget due to the current level of mortgage rates.

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

Potential home sellers are also finding current interest rates unacceptable, contributing to the significant lack of supply in the market. According to Redfin, a real estate agent, new registrations in the four weeks ended April 9 were down 25% from the same week last year. This continues an eight-month streak of double-digit declines.

“Even if the Fed decides not to hike rates next month, which would likely lower mortgage rates, the limited supply of homes for sale would remain a major stumbling block for potential buyers,” wrote Daryl Fairweather, chief economist at Redfin , in the report. “Rate rates falling below 6% would likely attract more buyers, but enough homeowners have rates in the 3% or 4% range that we’re not likely to see a big spike in new listings.”