Homebuyers Draw the Line at Mortgage Rates above 5.5%

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  • Homebuyers are reluctant to accept mortgage rates over 5.5%, causing some to delay their purchase, even if they can afford it.

  • Builders who offer subsidies to buyers for mortgage rates below 5.5% have been successful in selling homes.

  • The shortage of homes for sale, combined with high demand, is making it difficult for potential buyers to enter the market, despite the possibility of lower mortgage rates.

After years of government intervention to stabilize the housing market following the Great Recession and the COVID-19 pandemic, homebuyers are now facing a new challenge: mortgage rates. Today’s buyers have a skewed view of what “normal” mortgage rates are, thanks to the artificially low rates of the past few years. As a result, the majority of potential homebuyers, 71%, say they will not accept a 30-year fixed mortgage rate over 5.5%, according to a survey by John Burns Research and Consulting.

This aversion to higher rates is causing some buyers to sit on the sidelines, even if they can afford the monthly payments. 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. If so many potential buyers are saying they won’t buy unless they get a rate below 5.5%, they may be waiting for a while. The current 30 year fixed rate is around 6.4%, and mortgage rates are not expected to move much lower this year.

In fact, an April survey from U.S. News and World Report found that 66% of Americans who plan to buy a home this year said they are waiting until rates fall. Mortgage rates have been over 6% for nearly a year, exacerbating housing affordability challenges ahead of the spring 2023 homebuying season.

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%. “Today’s homebuyers are extremely sensitive to fluctuating interest rates, and a significant drop in mortgage rates would likely make the market more competitive,” wrote Erika Giovanetti, loans expert at U.S. News.

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.

This aversion to higher rates is not limited to homebuyers. Potential home sellers 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. “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.”

The current situation in the housing market, with high demand and limited supply, has put potential homebuyers in a tough spot. While many are waiting for mortgage rates to drop, it is unclear when or if this will happen. In the meantime, home prices continue to edge upwards, making it even more difficult for buyers to enter the market.

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