The housing market has been in a state of inertia, with mortgage rates hitting a 22-year peak. This has led to a slowdown in activity and stirred up fears of a potential real estate crash. However, it’s crucial to delve deeper into the situation to understand the true state of the market. At a certain interest rate, buyers will inevitably return, and sellers will be ready to part with their properties.
The current low interest rates have left homeowners with little choice but to stay put. The key to unlocking this stagnation in the housing market lies in the mortgage rates of 2024.
“Industry insiders predict a housing market revival once mortgage rates drop below 5%,” says Ken Baris, CEO of Berkshire Hathaway Home Services. He believes that this will be driven by increased buying power.
Ken Shinoda of DoubleLine Capital also shares this sentiment. He suggests that a drop to 5% interest rates could stimulate a U.S. housing market resurgence and potentially lower prices. This could provide the necessary push for buyers and sellers to engage and potentially establish a market-clearing price.
The 30-year mortgage rate, which nearly reached 8% in October, has since dropped to around 7%. Redfin (NASDAQ:RDFN) reports that this has led to a surge in housing market activity and buyer interest. This contradicts the traditional Wall Street belief that home prices move inversely to mortgage rates.
Forecasts from the S&P Dow Jones Indices group and a Fannie Mae survey predict that property values will appreciate in the coming year. This is primarily due to declining rates, but other key factors may also contribute to a bullish housing market scenario.
Many homeowners seem to be “locked in” to their current mortgages due to historically low rates below 4%. These extremely low mortgages have created a bottleneck that is unlikely to be resolved until interest rates decrease.
As time progresses, more buyers will inevitably encounter life changes such as expanding families or personal crises. This ensures a certain amount of inventory will always be in motion, regardless of the desires of buyers and sellers.
A recent study from the Wharton School highlighted that many households are caught in a bind between low-rate mortgages and the current higher rates. Even a 1% increase can lead to significant additional annual payments.
Danielle Hale, Chief Economist at Realtor.com, revealed that buyers are more adaptable and not tied to low rates, while existing homeowners are less open to change. Both groups have different views on the “magic number.”
Hale explained that determining a magic number for either group is challenging and subject to change over time. Even though we’ve seen historically low rates, like the rock bottom 2.65% mortgage rates in January 2021, these are unlikely to return. Adaptation to a new normal in the low fives is crucial.
The world has changed significantly since mortgage rates fell to less than 3% in January 2021. If interest rates drop from their current 7% to around 5.5%, we could witness a revival in real estate activity.
The future of the housing market depends on the Federal Reserve’s overnight rate policy and changes in mortgage bond demand. For now, mortgage rates need to decrease by at least one or two percent before we can expect any significant movement in the market.
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