The Housing Market and the Impact of Mortgage Rates

Despite recent increases in home prices and falls in mortgage rates, the housing market is still facing challenges, according to experts. The "lock-in effect," where homeowners are hesitant to sell due to their current low mortgage rates, is limiting the number of resale homes available. As a result, prices continue to rise as buyers compete for a limited pool of properties.

However, there may come a tipping point when mortgage rates reach a level that encourages more supply, leading to a decline in home prices. Portfolio manager Ken Shinoda from DoubleLine Capital suggests that this "magic number" is around 5% for fixed mortgage rates. In December, he explained that this rate would bring together willing buyers and sellers, resulting in a market-clearing price.

Looking back, rates were in the 5% range back in August 2022. Throughout 2023, they fluctuated between the 6% and almost 8% mark, making it harder for potential homeowners to qualify for mortgages. For example, at a 7% rate, a buyer purchasing a median-priced home at around $420,000 would need to earn about $115,000 to comfortably afford it, based on estimates from Redfin. Generally, it is recommended that mortgage payments should not exceed 30% of a buyer's income.

However, there is some good news on the horizon. Over the past few weeks, rates have fallen significantly following the U.S. Federal Reserve's adoption of a more accommodative monetary policy approach. As of last Thursday, the 30-year rate was averaging 6.67%, according to Freddie Mac. Industry experts anticipate rates falling even further to the range of 6.5% or possibly lower by the end of 2024.

If rates do reach the magic 5% range, it is expected that the increased supply and transaction volume resulting from lower mortgage rates may help decrease home prices nationwide, or at least stabilize them. Shinoda adds that in the current context of limited inventories, lower rates have the potential to revive transaction activity and soften stubbornly high home prices.

In conclusion, while the housing market faces challenges due to the lock-in effect and rising prices, there is hope that falling mortgage rates could provide the necessary boost to balance supply and demand, ultimately benefiting buyers and sellers alike.