Here’s Where Mortgage Rates Need to Be to Bring Back Homebuyers

Mortgage rates are well below their highs for the year, but the housing market remains stuck in neutral, which begs the question: how far would rates need to fall to bring buyers back?

The answer, according to recent surveys conducted by real estate software platform HomeLight, is at least half a percentage point lower than current rates. In a survey of top lenders from around the country, 63% said that the rate would have to be 5.75% or lower. Real estate agents from around the country, in a separate HomeLight survey, agreed that was the optimal rate to kickstart activity.

“If there is an interest rate drop to 5.75% or lower, I believe that we will see a very, very swift increase in buyer activity and buyer motivation to purchase,” Tampa Bay real estate agent Stacy Dillard said in a HomeLight report released last week.

The average 30-year mortgage rate is currently hovering around 6.30%, down from a high of 7% in January but slightly above the levels seen a few weeks ago, according to Freddie Mac. Rates fell steadily through August as financial markets priced in the likelihood that the Federal Reserve would cut its benchmark rate. But they ticked higher after the Fed, as expected, cut rates on Sept. 17.

Buyers and Sellers Stuck

New-home sales jumped in August as buyers took advantage of the lower mortgage rates and generous incentives offered by homebuilders. Sales of existing homes have remained sluggish.

In general, the housing market is in a holding pattern. For would-be buyers, rates remain prohibitively high, while sellers who locked in extremely low rates—the average 30-year mortgage was below 3% at points during the pandemic—are reluctant to give them up.

“Rates have not gone down significantly enough to move the needle—prospective buyers need to see a bigger difference in their potential monthly payment before things are going to change,”  said Mariah O’Keefe, a Redfin Premier real estate agent in Seattle. “If rates tick down below 6%, that will bring a lot of people back into the market.” 

Redfin estimates that nearly 20% of homeowners have a mortgage rate of 6% or higher, the highest level since 2015. Meanwhile, more than half of homeowners have a mortgage rate that is below 4%.

A drop in mortgage rates to below 6% could entice more homeowners to put their home on the market, according to the report from HomeLight.

More Activity Would Boost Prices

A rise in home-buying could mean a fast increase for home prices, which have been growing slowly in recent months. 

“If interest rates drop significantly, all the buyers that have been waiting will flood the market, and prices will soar again,” Houston agent Nathan LaLonde said in the report.

But the trick for potential buyers is timing, as sellers are still willing to make concessions as demand remains weak, according to Phil Crescenzo Jr., vice president of the Southeast Division at Nation One Mortgage Corporation

“Lower rates eventually affect demand and could have prices start increasing again, but not immediately,” Crescenzo Jr. said. “I think 0.5% is a market mover and anything in addition can add fuel to that fire.”