The recent pullback in mortgage rates from 8% is a promising development for potential homebuyers who have been sitting on the sidelines. However, further declines could lead to an unleashing of pent-up demand.
“If rates drop below 7%, I believe we will experience a surprisingly robust year,” stated Daryl Fairweather, chief economist at Redfin, in a segment on Yahoo Finance Live. “That’s when we can expect to see more individuals engaging in bidding wars.”
This week, the average 30-year fixed-rate mortgage for a home fell to 7.22%, as reported by Freddie Mac. There are also indications that rates are on track to decrease even more by the end of the year, with rates having decreased by over half a percentage point in the last five weeks.
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This decrease has prompted some buyers to re-enter the market. According to the Mortgage Bankers Association (MBA), mortgage applications for purchases increased by 5% for the week ending November 24 compared to the previous week.
Simultaneously, the median monthly mortgage payment has decreased by over $100 in the last month as rates have moved away from 8%.
At last week’s average rate of 7.29%, a buyer would be looking at a median monthly mortgage payment of $2,575. That’s a $164 decrease from the record high of $2,739 set a month ago, but still 13% higher than a year earlier, according to Redfin.
“The increase in rates to nearly 8% has reset the threshold for buyers interested in re-entering the market,” said Fairweather.
Despite this, purchase activity is still 20% lower than it was a year ago, as indicated by MBA’s findings.
However, there may be some hope for buyers still in search of properties. Redfin discovered that new listings experienced their largest year-over-year increase since 2021 during the four weeks leading up to November 26.
This surge in new listings has also contributed to an increased share of new listings on the market, climbing 5.8% year-over-year, according to Redfin data – the largest increase in over two years. In total, new listings amounted to 64,576, a notable difference from the declining numbers observed at this time of the year.
“There will be more people who wish to move due to new jobs, marriage, or having kids, thus creating demand,” Fairweather explained. “And if we have a strong stock market, people may feel more confident about spending money, but the high rates are currently the biggest obstacle in the housing market.”
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‘Limited inventory will create bidding wars’
Although some homeowners have listed their properties on the market, many are still hesitant to do so.
According to Fannie Mae’s latest housing sentiment index, 37% of homeowners believe it’s a bad time to sell a home. Additionally, 78% of respondents also expressed dissatisfaction with the economy, marking a 7-percentage-point increase from the previous month.
The potential issue is that rates may decrease next year, prompting more buyers to return to the market, but not sufficient to convince enough homeowners to sell their properties.
“If rates decline, we will see more buyers returning to the market, and with limited inventory, bidding wars that drive up prices will be created,” Fairweather predicted. “We are witnessing some relief in new listings right now, with more sellers deciding that now is the best time to sell, and maybe that trend will continue into next year. So, hopefully, we’ll have a more balanced situation even if rates do decrease.”
According to Redfin, the available inventory of homes on the market equated to 4.2 months of supply as of November 26. A balanced market is typically considered to have 4 to 5 months of supply, according to Redfin’s standards.
“But I don’t believe that balance will be sustained. Overall, the housing market’s story is one of fewer available homes compared to the number of individuals seeking to buy a home… The slight decrease in rates makes me more optimistic, but I anticipate another sluggish year at minimum if we look at historical data,” Fairweather concluded.
Gabriella is a personal finance and housing reporter at Yahoo Finance. Follow her on Twitter @__gabriellacruz.
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