Mortgage rates have reached a 22-year high, unsurprisingly halting activity in the housing market. Alarm bells continue to ring from some doomsayers that an impending real estate crash (whether contained to just the commercial real estate market or able to spread to the residential real estate sector) is likely to come.
However, I think further analysis is needed to determine how stuck this existing market is. That’s because, at some interest rate level, buyers will start buying again, and sellers will be willing to offload their properties (and effectively become buyers).
Lower interest rates have trapped existing homeowners in their homes, whether they like it or not. Here’s what the data say about what mortgage rates in 2024 could unstick this stagnant housing market.
What Analysts Say
Industry insiders predict a housing market revival once mortgage rates drop below 5%. CEO of Berkshire Hathaway Home Services, Ken Baris, trusts increased buying power will cause this.
Additionally, Ken Shinoda of DoubleLine Capital suggested that a drop to 5% interest rates could lead to a U.S. housing market comeback and potentially lower prices. That would give buyers and sellers the needed nudge to engage and potentially make a market-clearing price.
The 30-year mortgage rate, which climbed to a very near 8% in October, has fallen to around 7% at the time of writing. According to Redfin (NASDAQ:RDFN), that caused a rise in housing market activity and increased buyer interest. But, this goes against Wall Street’s conventional wisdom, which suggests that home prices move inversely to mortgage rates.
The S&P Dow Jones Indices group and Fannie Mae survey foresee property values will appreciate in the coming year. That is mainly tied to declining rates, though it could also be possible that other key factors play into a bullish scenario for housing.
The 5% Lock-In Impact
Many sellers appear to be “locked in” to their current mortgages. With historically low rates below 4%, these rock-bottom mortgages create a bottleneck that isn’t likely to resolve until lower interest rates materialize.
Of course, as time passes, more buyers come face-to-face with changes like expanding families or personal crises. A certain amount of inventory will always move, whether buyers and sellers want to or not.
Interestingly, a recent study from the Wharton School revealed that many households are stuck between low-rate mortgages and current higher rates. Even a 1% increase will result in significant additional annual payments.
Danielle Hale, Chief Economist at Realtor.com, dropped the curtains on the fact that buyers are more adaptable and not tied to low rates, while existing homeowners are less receptive to change. Both also have varying perspectives on the “magic number.”
Hale clarified that determining a magic number for either group is full of hurdles and likely to change over time. Despite historically low rates, like the rock bottom 2.65% mortgage rates seen in January 2021 are unlikely to return. In the low fives, adaptation to a new normal is the most important.
So, What’s the Magic Number?
Mortgage rates fell to a rock bottom of less than 3% in January 2021, a world completely different from the one buyers and sellers are operating in. If interest rates move from their 7% level to around 5.5%, we could see some renewed activity and favor around real estate again.
We’ll have to see what the Federal Reserve does with its overnight rate policy and how mortgage bond demand changes over time. But for now, mortgage rates need to move at least one or two percent lower before we see any sort of meaningful movement in the market.
On the date of publication, Chris MacDonald did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
