Home prices have hit another all-time high, and mortgage rates have begun to fall — but that won’t be enough to revive the housing market just yet, according to one expert.
Even though borrowing costs are dropping, drawing home buyers off the sidelines, the “lock-in effect” of homeowners being reluctant to sell and give up their current 3% or 4% rate is limiting the number of resale homes on the market. As buyers converge on a smaller pool of available properties, prices are moving up.
But there will come a point when rates will fall far enough to boost supply sufficiently to cause a decline in home prices, Ken Shinoda, a portfolio manager at DoubleLine Capital, wrote in a December note.
“There is a magic number for fixed mortgage rates that I think would unfreeze the housing market — in other words, a price bringing together willing buyers and sellers, a market-clearing price,” he said. “By my lights, that number has a 5% handle.”
Rates were in the 5% range in August 2022, and over the course of 2023, they went from the 6% range in the first few months of the year to nearly 8% in October, making it harder for aspiring homeowners to qualify for a mortgage.
With a rate of 7%, a buyer purchasing a home at the median price of around $420,000 would have to earn about $115,000 to comfortably afford it, according to Redfin’s estimate. The rule of thumb is that a monthly mortgage payment should be no more than 30% of a buyer’s income.
Rates have fallen significantly over the last two weeks, after the U.S. Federal Reserve signaled a more dovish stance on monetary policy. The 30-year rate was averaging 6.67% as of last Thursday, according to data from Freddie Mac. Many in the industry expect rates to fall to the 6.5% range or even lower by the end of 2024.
If rates fall to the 5% range, “the supply and transaction volume unleashed by mortgage rates … might decrease home prices nationwide, or at least flatten them,” Shinoda added.
“In today’s context of frozen inventories, lower rates can potentially revive transaction activity and soften stubborn home prices,” he added.