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Is there a magic number for mortgage rates to jolt home sales?

The end of 2023 has brought the first hints of a softening of the housing market that could awaken buyer demand and entice more home owners to list their properties for sale.

The average rate for the 30-year fixed mortgage fell again this week to 6.61%, now down more than a full point from 7.79% in October, according to Yahoo Finance. The prospect of more manageable monthly payments is expected to draw more buyers into the market this winter. Many of them will hope to get ahead of a rush of demand in the spring, typically the busiest time of year.

For many would-be buyers, the falling mortgage rate is both a blessing and a curse. Since home prices remain historically high, introducing more competition in the market is going to drive up prices for a limited number of homes. Many potential sellers simply won’t want to budge from their existing mortgages, which may be in the 3-4% range, just to enter the market in its current state.

But some analysts have considered whether there may be a sweet spot for mortgage rates that will encourage more people to list their homes — especially if their plans are to buy another property.

“There is a magic number for fixed mortgage rates that I think would unfreeze the housing market — in other words, a price bringing together willing buyers and sellers, a market-clearing price,” Ken Shinoda, a portfolio manager at DoubleLine Capital, wrote in a note this month. “By my lights, that number has a 5% handle.”

Rates were last in the 5% range around August 2022. At the time, that was a shock to an overheated market that had become barren of listings because of the demand when rates were 3-4%. The continued climb of rates since then has made homes unaffordable for many people who had hoped to buy.

For potential sellers, there has been a so-called “lock-in effect” that keeps them from abandoning a mortgage deal they won’t be able to get on a new home. About two-thirds of outstanding U.S. mortgages have rates under 4%, according to More than 90% of mortgages have rates below 6%.

Shinoda said if mortgage rate reach about 5% in the next year, it could help create overall housing volume and motivation among both buyers and sellers. Shinoda said this could ease home prices as well.

“In today’s context of frozen inventories, lower rates can potentially revive transaction activity and soften stubborn home prices,” Shinoda said.

The U.S. Federal Reserve has signaled plans to cut benchmark interest rates up to three times in 2024.

Jeffrey Ruben, president of WSFS Mortgage, told Yahoo Finance it will likely take some time for the market to adjust to lower rates. And in the meantime, that could mean a period of intense buyer competition.

“If rates fall, we will see more buyers come back to the market and with limited inventory that will create bidding wars that push up prices,” Ruben said. “We’re seeing a bit of relief on new listings right now with more sellers deciding now is the best time to sell and maybe that will continue into next year.”

Photo credit Emre Can Acer via