Mortgage rates have made a noticeable decline from peaks in the high-7% range last fall, and the housing market is abuzz in the wake of this week’s Federal Reserve benchmark rate cut.
Are buyers and sellers ready for a little magic?
Some real estate experts say there’s a “magic number” for 30-year rates at which the housing market really heats up. Home sales have been lethargic: They’re down 4.2% from where they were a year ago, according to newly released data from the National Association of Realtors. And the market wasn’t exactly great a year ago, when San Francisco home sales hit a record low. Redfin data from this week revealed home sales and pending sales last month were at their lowest rates since the early days of the pandemic.
But another number is on its way down: Average 30-year mortgage rates. Freddie Mac data indicated average rates were at 6.09% on Friday following Wednesday’s Fed rate cut.
The so-called “magic number” to get buyers and sellers excited is 6%, according to a recent article in Fortune that cited “Shark Tank” star and real estate company founder Barbara Corcoran and other industry pros.
“Historically, 6% is a very good rate,” said Nadia Evangelou, senior economist and director of real estate research for the National Association of Realtors. Mortgage rates soared above 18% in the early 1980s, and last fall’s 7.79% peak was the highest we’ve seen in the past 20 years.
But with 3% rates a very recent memory, and prices continuing to rise, has that 6% number lost a bit of its sparkle?
Nikki Edwards, a real estate agent in the Bay Area, said people shopping for a home have been excited about the descent toward 6%. For well-qualified buyers, it’s not unthinkable to get below that number. She said she’s had clients lock in at 5.875% and even 5.65%.
“After hitting 6%, buyers have come off the fence,” she said.
What will sellers do?
The real question is whether 6% rates are going to be enough to entice people who already own homes to sell them, said Marco Giacoletti, assistant professor of finance and business economics at USC Marshall School of Business. Six out of seven homeowners in the U.S. have a mortgage rate below 6%, according to Redfin data, and more than half of all homeowners have a rate below 4%.
“Whether market rates are at 7 or at 6, I don't think completely changes the decision of these potential sellers. It keeps them locked into their houses,” Giacoletti said.
Megan Micco, a real estate broker who works in the inner East Bay, said that’s what she’s seen. Dropping rates bring a “huge flood” of buyers into the market, but there aren’t enough houses to sell to them.
“Many sellers have mortgage interest rates that are at incredible lows — sub-3%,” she said. “And so they're relatively sensitive to the higher borrowing cost. And so that's really keeping inventory locked up.”
Mortgage rates aren’t the only factor people consider when they’re deciding to shop for a home. It’s a holistic equation. There’s price, which continues to reach new highs around the Bay Area, and there’s supply, which is historically constrained across California.
The home insurance factor
And in the Bay Area, Micco said, there’s another important consideration: The cost of home insurance.
She said she’s seen homes where the cost of insurance is over $1,000 a month. Buyers have been much more sensitive about construction and renovations, even asking to see receipts for work performed and requesting additional inspections to make sure their potential asset is insurable. She said “unless we make a really quick turnaround on climate change,” the insurance cost problem is likely to only get worse.
So if it’s not 6%, is there a “magic number” for California’s home market?
Don’t hold your breath for rates to approach 3% again anytime soon unless there’s another looming economic catastrophe. Of course, we’ve seen two of those just in the past 15 years, so never say never.
Two more Fed rate cuts are anticipated this year, though whether they will come to pass depends on the economy and the election. Experts anticipate an average 5.9% 30-year mortgage rate by the end of 2024.
Cheaper rates also mean real estate developers can take on more ambitious projects, potentially biting into the state’s persistent supply problem.
Real estate insiders do think there’s a number that might get people a little more inspired to get back into the market.
“5% is what really starts to motivate people,” Micco said.
Edwards agreed.
“I think 5% is going to be a game changer.”Pickleball