If you lived through the 1980s, today’s 7% mortgage rates probably don’t sting as much as they do for those who weren’t around, or weren’t buying a home; and they hurt even more if you recall the historic lows throughout the pandemic.
In October last year, mortgage rates reached a more than two-decade high; they’ve come down since, but are still a far cry from the rates of a few years ago. The sudden shock has thrown the housing world off balance, but according to a top real estate chief executive, there’s a magic number that could get it closer to an equilibrium.
“I think 6.5% I’d feel good about … but the magic number is 5.9999,” the cofounder and chief executive of realty giant Compass, Robert Reffkin, said in an interview with CNBC on Friday. “That’d be marketing magic, and would tell the world that mortgage rates are at a level where they should go and grab a property.”
For the 30-year fixed mortgage, daily rates are at 7.02%, and weekly rates are at 6.87%; so still higher than what Reffkin believes might trigger some improvement in the market. As long as we’re around 7%, “we are going to continue to be at a low 4 million seasonally adjusted annual rate of home sales,” he said.
Existing home sales data released earlier that day showed sales dipping 0.7% in May from the prior month, and 2.8% from a year earlier, to a seasonally adjusted annual rate of 4.11 million. Last year, existing home sales fell to their lowest level in almost three decades, of about 3.8 million. A lot of that decline is the result of mortgage rates shooting up so quickly from historically low levels, that homeowners don’t want to sell their home and give up their low rates. Consider this: A recent Realtor.com analysis of data from the Federal Housing Finance Agency found that more than half of outstanding mortgages have a rate of 4% or lower. On the other hand, high home prices and high mortgage rates are somewhat dampening demand, meaning that not a lot of people are selling or buying homes.
And the phenomenon described above, known as the lock-in effect, isn’t the only reason why there’s trouble in the housing market; there’s a broader issue of supply that’s pushing home prices higher and higher.
“Prices last month were the highest in recorded history, and the reason they’re the highest is because there’s not enough supply,” Reffkin said. We need policies that encourage more development, assumable mortgages so people won’t feel like they’re losing a financial asset or low mortgage rate when they sell, and interest rate cuts to bring mortgage rates down, to increase supply, he argued.
Either way, Reffkin said, we’re in a “somewhat of a confusing market because there are mixed signals.” Last month, he noted, home prices hit their highest price ever recorded, according to data from the National Association of Realtors, and more homes on the market had price cuts than any other time over the past decade. It’s not clear what data Reffkin was citing for his last point, but according toZillow, 23.9% of listings in May had a price cut—and Redfin reported price cuts are more common, too.
Reffkin expects home prices to be “relatively flat on a month-over-month basis,” which is in line with what we’ve seen this year. The real change, or increase, happens when compared with a year earlier, and so far existing homes are selling for close to 6% more than they were last year.