Homebuyers’ mortgage interest tipping point is artificially low

Home in Centreville, Maryland, USA, Tuesday, April 4, 2023.

Nathan Howard | Bloomberg | Getty Images

Today’s home buyers are exceptionally sensitive to mortgage interest rates with house prices so high ̵[ads1]1; and they have 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 skewed view of what “normal” mortgage rates are.

The majority of potential homebuyers, 71%, say they would not accept a 30-year fixed mortgage rate above 5.5%, according to a survey conducted in March by John Burns Research and Consulting. 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 going back to 1971 is 7.75%, according to Freddie Mac.

“Our consulting team has witnessed this across the country, noting that homebuilders who choose to subsidize buyers’ mortgage rates, bringing the total interest rate below 5.5%, have achieved the greatest success. Many of the largest builders in the country have been buy mortgage rates down 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 because they are generally less focused on the home price and more on the monthly payment; that the monthly payment is about the price.

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

An April survey by US News and World Report appears to confirm these findings: It found that 66% of Americans who plan to buy a home this year said they are waiting until prices fall.

“Mortgage rates are about twice as high now as they were just over a year ago, compounding housing affordability challenges ahead of the spring 2023 home buying season,” Erika Giovanetti, a lending expert at US News, wrote in a column discussing the survey’s findings. “Today’s homebuyers are extremely sensitive to fluctuating interest rates, and a significant drop in mortgage rates is likely to make the market more competitive.”

The US News survey also found that 25% of homebuyers holding out for lower rates wait until they fall below 5%. Almost two-thirds of respondents said they have had to reduce their housing budgets due to current levels of mortgage interest rates.

While some buyers can’t afford the home they 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 prices just because they may have experienced them in the past, according to the John Burns report.

Potential home sellers are similarly finding current prices unacceptable, contributing to the severe lack of supply on the market. New listings in the four weeks ended April 9 were 25% lower than the same week a year earlier, according to Redfin, a real estate brokerage. It 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 will remain a major obstacle for potential buyers,” wrote Daryl Fairweather, chief economist at Redfin. in the report. “Rates falling below 6% are likely to pique the interest of more buyers, but enough homeowners have rates of 3% or 4% that we are unlikely to see a large increase in new listings.”