How Low do Rates Need to Fall?

How low do rates need to fall to thaw the “frozen” market?

As I’ve mentioned several times in my blog and newsletters, our current market is suffering from a lack of inventory. Most sellers with an ultra-low mortgage rate (3% +/-) will not consider selling a home if their replacement home involves a new mortgage. Today’s average 30-year rate is 6.6%, so their new rate could double their existing mortgage rate. This explains why most of the sellers I have been working with are either children selling the homes of their deceased or aging parents, or those moving out of state and paying cash for their new home.

We are also experiencing a weakening buyer demand. A large majority of buyers are sitting on the sidelines because of the current rates, despite them being relatively low from a historical standpoint.

This begs the question, “Is there a number that would bring buyers and sellers back into the market?” According to a September study by John Burns Research & Consulting, 4.99% is the number that would bring a majority (57%) of the buyers back into the market. Based on the chart below, only 13% of buyers are willing to purchase a home with rates at their current level of 6.6%, down from 21% in September when the study was done, and rates were at 6.2%. Mortgage rates dropped as low as 6.1% prior to the Fed’s aggressive .5% rate cut a couple weeks ago but have since increased by more than .5% since the cut, because of the stronger than expected jobs report on Friday and other strong economic data that puts future rate cuts in question. This certainly explains the slowdown on showings and offer activity we’ve experienced in the last couple of weeks.

Many analysts believe the economy is not as strong as some of the recent numbers would indicate, and that rates will reverse their upward trajectory in the next month or so. The recent jobs report numbers, for example, were boosted by a historically high number of government jobs, which are not necessarily a reflection of a strong economy or labor market. We are only a month away from the election, so there is a strong possibility of something major happening that could move the market in either direction. I’m holding my breath and hoping for the best until the election is over.