5.5% may be a magic number for mortgage rates

By Anna Bahney, CNN

Home buyers have proved to be mortgage rate sensitive, with home sales over the past year tanking as rates have surged, and improving during periods when rates have ticked down. The past year has shown that as monthly mortgage payments decline, demand goes up.

But a new study shows that 5.5% may be the magic mortgage rate that gets things moving in the market, according to analysis from John Burns Research and Consulting, which specializes in the housing industry.

Mortgage rates more than doubled over the past year, reaching as high as 7.08% in November, according to Freddie Mac’s average weekly mortgage rate for a 30-year fixed rate loan. Since then the rate has declined by almost a full point, and currently sits at 6.27%.

Many homeowners who bought or refinanced into ultra-low mortgage rates during the past few years are reluctant to sell and become a home buyer at a much higher rate. This is keeping inventory historically low.

Over half of people in a survey of 1,300 homeowners and renters with household incomes of $50,000 said that now is not a good time to buy a home. Only 22% reported it being a good time to buy.

The survey found that 5.5% mortgage rates seem to be the tipping point.

A majority of respondents — 71% — said they are not willing to accept a mortgage rate above 5.5%. Meanwhile, 62% of consumers believe a historically normal mortgage rate is below 5.5%.

“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,” CEO John Burns and Maegan Sherlock, a senior research analyst, wrote in an note about the findings. “Many of the largest builders in the country have been buying mortgage rates down below 5%.”

They report that low inventory in the existing home market is helping new builders tremendously.

“Paying as much as 6% of the mortgage amount to buy down mortgage rates has been relatively painless since builders had previously raised prices so much,” the researchers write.

Mortgages rates are still far from an average of 5.5% for a fixed-rate 30-year loan. And it may be hard to shake homeowners out of their fixation on 5.5%, because about 85% of homeowners have mortgage rates at 5% or below, according to a Redfin analysis of Federal Housing Finance Agency data.

Looking at forecasts of mortgage rates for the rest of the second quarter of 2023, no major forecast is even predicting rates under 6%.

The Mortgage Bankers Association predicts the average 30-year fixed rate to settle at 6.1% and Wells Fargo at 6.2%, in the second quarter. Fannie Mae and the National Association of Home Builders had the highest forecasts of 6.6% and 6.56%, respectively.

Furthermore, 5.5% is lower than the historical average for mortgage rates. Historically, the average rate between 1971 and 2023 has been 7.75%, according to Freddie Mac. Average rates reached as high as 18.83% in October 1981 and as low as 2.65% in January 2021.

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