last week, Realtor.com releases another version of its “magic number” predictions. The numbers in question are mortgage interest rates low enough to “unfreeze” the real estate market.
We know the market has been stuck for over a year.
- housing prices It’s very high and continues to rise.
- Mortgage interest rates are high and are not showing much of a downward trend.
- There aren’t enough houses to go around, especially those in remote areas. affordable price.
Something has to give.
The consensus is that this is something mortgage interest rate-It will take a significant decline for the housing market to return to anything close to normal.
What is the magic number?
So, Realtor.com asks, what is the mortgage rate threshold that buyers need to cross to start buying again? Well, the answer depends on who you ask and when.
Of the 5,000 U.S. consumers surveyed, 22% said they would consider buying a home if interest rates fell below 6%. Also, for his 18% of respondents, a rate of less than 7% is considered sufficient.
Long-suffering Millennial and Gen Z buyers are even more patient with high interest rates, with 47% of Millennials and 37% of Gen Z having interest rates above 8%. Even so, they said they would still take the plunge and buy it. Basically, these categories of buyers will buy no matter what.if They manage to save enough money to find a house to buy.
ask the right questions
But there’s an elephant in the room that predicts this “magic number.” That’s not asking the right question. And because you’re not asking the right questions, your choice of respondents isn’t accurate enough either.
First-time buyers may be frightened and discouraged by the new reality of high home prices and high interest rates, but they won’t give up on the realization that homeownership is a dream worth striving for. But first-time buyers also have no power in the current real estate market dynamics. The people who do so are existing homeowners who are not selling. These are the people who are worth asking for the “magic number” that will give them enough confidence to move and ultimately release their inventory.
As it turns out, there’s another study that spoke to the right people. John Burns Research & Consulting Last year, a survey of existing homeowners found that 71% of prospective homebuyers who were planning to use a mortgage to purchase their next home said they would not accept a mortgage interest rate higher than 5.5%. It turned out that there was no such thing.
Note that this question is not about how much existing homeowners can afford (all respondents had a household income of $50,000 or more), but about the amount they are willing to accept. And the majority, 62%, believe that “historically normal mortgage rates are less than 5.5%.”
This perception is factually inaccurate. According to Freddie Mac records dating back to 1971, Long-term average mortgage interest rate is just under 8%. So first-time millennial buyers actually have more realistic expectations than existing homeowners.
Of course, that’s because 80% of existing homeowners currently have mortgages with interest rates below 5%, and a third with interest rates below 3%. Jiro. It’s understandable that many of them don’t want to sell and lock in current interest rates (which at the time of writing were at a 30-year average of 7.9%).
Will the market be unfrozen in the near future?
The reality is that we are far from the “magic number” of 5.5%, which theoretically would require sellers to release all of their inventory. Of course, some people sell anyway for some pressing life reason.
recent research Research from the Haas School of Business shows that a 1% increase in mortgage rates reduces the chance of moving by 9%, but that “if the benefits of refinancing outweigh its costs, the probability of moving is independent of mortgage rates. “become”.
That being said, the incentive to move should be quite high (for example, a significant increase in salary). And even then, low mortgage rates often trump wage increases. When current fixed interest rates are low enough, people tend to stay put.
So what could really unfreeze the housing market? One solution could be more portable mortgage products that allow you to transfer your mortgage to a new property at an existing interest rate there is. Another solution could be to shorten the term of typical fixed mortgages, as in many other countries. If not, we could see a longer freeze, with moves by existing homeowners dropping by 25% by 2033, according to Haas research.
Make easier and smarter financing decisions
Deciding how to finance real estate is one of the biggest headaches for real estate investors like you. Making the wrong decision can ruin your deal.
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Note by BiggerPockets: These are the opinions expressed by the author and do not necessarily represent the opinions of BiggerPockets.
