Mortgage Rates Below 5% Seem to Be the Sweet Spot for Home Buyers

I think we all know 30-year fixed mortgage rates aren’t going back to 2%. Or even 3%.

Those days seemed to have come and gone, thanks to the Fed’s inflation fight.

Ironically, the Fed was also the reason mortgage rates went that low to begin with.

Without their massive bond buying program known as Quantitative Easing (QE), mortgage rates would have never hit those levels.

But there’s evidence a mortgage rate in the 4-5% is sufficient to reinvigorate the flagging housing market.

Mortgage Rates Are Too High for Most to Move Right Now

A new survey from home equity investment company Point revealed that 22% of homeowners want to move by 2023, but most feel stuck.

As to why they feel stuck, the mortgage rate lock-in effect is mostly to blame.

Simply put, many of today’s homeowners have super low, if not record low, mortgage rates. And they don’t want to lose them.

Even worse, they don’t want to trade them in for a significantly higher rate on a more expensive property.

At the same time, everyone has their price, and this is true even if it means bidding adieu to an ultra-low mortgage rate.

The question is what is that price? What’s low enough to kiss that sweet low interest rate goodbye?

Well, Point asked these same prospective home buyers what would stop them from moving by the end of 2023.

And it appears mortgage rate are the sticking point, for both those with an existing mortgage and those with no mortgage.

Point found that 29.7% said their “mortgage rate for a new home would be higher than my current mortgage rate.”

And another 12.7% said despite not having a mortgage, “high mortgage rates would prevent me from buying a new home.”

In total, that’s 42.4% of respondents looking to buy a home in the next year. So it’s clear mortgage rates are just too darn high.

The next logical question is what rate is acceptable to buy a home in today’s market?

A Mortgage Rate Between 4-5% Would Suffice for Most Home Buyers

Point also asked what rates would need to be to get these home buyers to consider a purchase in the next 6-12 months.

While 10.2% would move ahead with a rate between 6-7%, and 22.8% would be OK with a rate between 5-6%, the sweet spot seems to be the 4-5% range.

Some 28.7% of respondents picked that mortgage rate range, more than any other option listed.

Taken together, about 62% of these prospective buyers would be cool with a mortgage rate between 4% and 5%.

That’s the good news for the housing market, especially since a 30-year fixed rate between 4-5% seems like a real possibility in 2023.

Thanks for a couple solid CPI reports indicating waning inflation, interest rates have been trending lower.

At last glance, the 30-year is now pricing in the high 5s or low 6s, meaning it won’t take much more to get to that sweet spot.

This is especially true if inflation continues to decline into 2023 and the Fed wraps up its own interest rate increases.

Their stance has already softened and they’ll only raise their fed funds rate .50% today and even less in 2023.

This should hypothetically lead to even lower mortgage rates in 2023, possibly sub-5% mortgage rates, solving that stubborn issue.

There’s just one more thing – high home prices.

Home Prices Also Need to Come Down Another 5%

Yes, mortgage rates are currently too high and have eroded affordability. But the same is true of home prices.

This one-two punch has stopped the housing market in its tracks. If home prices were reasonable, the high mortgage rates wouldn’t be as much of a problem.

And this is evidenced in Point’s survey, which found that 31% of respondents wouldn’t be able to purchase a home in their desired timeframe due to home prices being “too high.”

That 31% share was the highest of all the potential roadblocks, though there were the two interest rate-related questions that collectively held a 42.4% share.

Still, it shows that there are several issues holding back the housing market, and not one easy solution to gets things back on track.

However, a combination of lower mortgage rates and slightly reduced asking prices could revive the housing (and mortgage) market in 2023.

Interestingly, 71.9% of respondents believe mortgage rates will be “much or somewhat higher” 12 months from now. That remains to be seen.

(photo: Carolina Georgatou)