The Magic Number: What Mortgage Rates Would Get Buyers and Sellers Excited To Move?

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Dec 1

Lately, the universe has hit the pause button on the housing market.

The double whammy of persistently high mortgage rates and pricey homes has paralyzed the housing market, pushing buyers to the sidelines.

Would-be sellers aren’t racing to plant a “for sale” sign in their yard, either. The reason sellers are staying put is simple: If they list their homes, they will also face getting a new mortgage at a higher rate.

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So, the market remains stuck as both sides of the market eye the mortgage rates, hoping for a friendlier number.

This problem has many wondering what magical mortgage rate would get both parties moving in and out of homes again. We asked mortgage lenders to look into their crystal ball (and loads of data) for the answers.

The mortgage rate rise

Two years ago, mortgage rates were in the low 3% range. Rates doubled by November 2022; since August of this year, they’ve topped 7%.

That number is too steep for many. But if mortgage rates hit a lower number, would it be enough to motivate buyers and sellers to finally get the real estate market moving again? Or will the persistently high home prices keep the market stuck in neutral?

“If the [Federal Reserve] keeps rates stable and the market stabilizes, then I believe you will see more people get off the fence and move forward,” says Mason Whitehead, a branch manager at Churchill Mortgage in Dallas. (It’s important to note that mortgage rates are separate from the Fed’s rate, but they often rise and fall in tandem.)

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How mortgage rates affect would-be sellers

According to Whitehead, mortgage rates are not an absolute deterrent to sellers if the desire to move is strong. But in today’s market, the borrowing rates are a significant hurdle for even the most determined would-be sellers.

For instance, homeowners who refinanced to a low rate a couple of years ago are staying put.

Others might be worried they can’t afford to sell—and then buy a new home. That’s because today’s higher-priced homes and elevated interest rates could offset any financial gains they would make selling their house. Even if they’re sitting on a sizeable chunk of home equity, the profits might not make up for the new, higher mortgage payments.

What rate would nudge potential homebuyers?

According to experts, it’s not so much a number that would lure potential homebuyers back to the market but a change in perspective.

For some home shoppers with mortgage rate resentment, it’s unfathomable to sign up for a 7%-plus rate when the rates were less than half that just two years ago.

“If we can get the rates back into the [5% range], it would be a huge motivating factor,” says Whitehead. “The sting is less painful when you go from 3% to 5% and might just be enough to motivate homebuyers to start house shopping again.”

Ralph DiBugnara, president of Home Qualified and senior vice president at Cardinal Financial in New York City, thinks a consistent move back to the 6.5% to 7% range might be enough to bring homebuyers out of hibernation.

“The average interest has been close to over 8% in the last two quarters of 2023,” says DiBugnara. “A rate drop of 1% would signify to most something to take advantage of.”

How much could you save with a lower rate?

To illustrate how much cash buyers could save with lower mortgage rates, let’s run some numbers. (These numbers will vary depending on your closing costs, which are typically 2% to 7% of the loan amount.)

In this example, the price of a home is $500,000. If you put 20% down, your loan amount would be $400,000. If you snagged a 7.25% interest rate and then paid a total of $11,995 in cash to close, DiBugnara says your monthly payment would be $2,728.71.

If you wait for the rates to dip to 5.75% using the example above, DiBugnara calculates your monthly payment would go down to $2,334.29. That’s a savings of $394.42 a month, or close to $5,000 for the year.

What’s the outlook for interest rates?

While no one knows what the Federal Reserve will do in the future, Realtor.com predicts mortgage rates will be 6.8% next year, and then fall to about 6.5% by the end of 2024.

Mortgage lenders have their own thoughts as well.

Matt Dunbar, the vice president at Southeast Region for Churchill Mortgage in Miami, thinks the latest consumer price index report indicates the Fed’s strategy to tackle inflation is on track.

“We will see a gradual reduction in mortgage rates, nearing 6.5% to 6.75% by mid-2024,” predicts Dunbar. “I’m also optimistic that, barring any major economic upheavals, we could see these rates nearing 6% to 6.25% by the end of 2024.”