Homebuyers’ mortgage rate tipping point 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 first 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 will not accept a 30-year fixed mortgage rate over 5.5%, according to a survey done in March by John Burns Research and Consulting. The current rate, however, is around 6.4%.

In addition, 62% of buyers said they believed that 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 home builders who choose to subsidize buyers’ mortgage rates, bringing the overall rate down below 5.5%, have been achieving the most success. Many of the largest builders in the country have been buying mortgage rates down below 5.0%,” said CEO John Burns and Maegan Sherlock, a senior research analyst, in the report.

For most buyers, the mortgage rate determines what they can afford, because generally they are focused less on the home price and more on the monthly payment; that monthly payment is all about the rate.

If so many potential buyers, however, are saying they won’t buy unless they get a rate below 5.5%, they may be sitting on the sidelines for a while. Mortgage rates have been over 6% for nearly a year and are not expected to move much lower this year.

An April survey from U.S. News and World Report seems to corroborate these findings: It found that 66% of Americans who plan to buy a home this year said they are waiting until rates fall. 

“Mortgage rates are about twice as high now as they were a little over a year ago, which has exacerbated housing affordability challenges ahead of the spring 2023 homebuying season,” wrote Erika Giovanetti, loans expert at U.S. News, 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 would likely make the market more competitive.”

The U.S. News survey also found that 25% of homebuyers who are holding out for lower rates are waiting until they drop below 5%. Nearly two-thirds of respondents said they’ve had to reduce their housing budgets due to the current level of mortgage rates.

While some buyers can’t afford the home they might want at today’s rates, others are choosing not to buy simply because they don’t like the idea of a higher rate, even if they can afford it. Older consumers aren’t necessarily more willing to accept higher rates just because they may have experienced them in the past, according to the John Burns report.

Potential home sellers, likewise, find the current rates to be 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 the year before, according to Redfin, a real estate brokerage. That continues an eight-month streak of double-digit declines.

“Even if the Fed chooses not to hike interest rates next month, which would likely bring down mortgage rates, the limited supply of homes for sale would remain a major obstacle for would-be buyers,” wrote Daryl Fairweather, chief economist at Redfin, in the report. “Rates dipping below 6% would probably pique the interest of more buyers, but enough homeowners have rates in the 3% or 4% range that we’re unlikely to see a big uptick in new listings.”