Ever since mortgage rates surged from their record lows in early 2022, economists have been attempting to figure out what specific rate would get the housing market moving again.
Part of it is just math, or what’s affordable to your average home buyer today.
The other piece is human psychology; what mortgage rate would entice someone to jump in and stop renting?
For a while, this so-called “magic mortgage rate” was 5.5%, but it’s now apparently 6%.
I surmised that this could be the case a couple months ago, and now the National Association of Realtors has posited the same.
What Would It Take to Get Prospective Home Buyers Off the Fence?
Back in the spring of 2023, John Burns Research & Consulting argued that we needed to see the 30-year fixed at 5.5% or lower to get prospective home buyers off the fence.
Their survey of more than 1,300 homeowners and renters conducted earlier that year found that 71% of prospective home buyers who planned to take out a mortgage wouldn’t “accept a mortgage rate above 5.5%.”
At the time, the 30-year fixed was averaging around 6.25%, or roughly 75 basis points above this critical threshold.
As we later found out, it would only get worse, with the 30-year fixed climbing to a near-21st century high of about 8% in October 2023.
But because the 30-year fixed was closer to 5% in April 2022, the folks surveyed likely felt that 6.25% was simply too high to accept.
That same survey discovered that respondents felt “a historically normal mortgage rate” was something below 5.5%.
This despite the long-term average for the 30-year fixed being about 7.75% since 1972.
Of course, with mortgage rates hovering between 2-4% for about a decade before finally rising in early 2022, and climbing by record amounts, you could hardly blame them.
After all, we had never seen rates increase so rapidly in such a short period of time, even if they remained 10 full percentage points below those 18% rates in the 1980s.
Going from sub-3% to over 7% in less than a year was unprecedented.
The Magic Mortgage Rate Is Rising…
Now some good news. Perhaps because everyone got used to the higher mortgage rates of the past few years, and saw even worse (8% in late 2023), they’ve had time to adjust their expectations.
This is the beauty of the human mind. Once it sees worse, it takes comfort in something better, even if it’s not as good as it used to be.
That’s what I believe is going on with mortgage rates these days. All the way back in late 2022, I said your brain would soon think a 5% mortgage rate is pretty good.
That was in relation to mortgage rates starting the year in the sub-3% range.
But now that rates have been in the 7% range for much of the past two years, apparently your brain is okay with an even higher rate.
It’s all relative, right? We no longer need a 5.5% mortgage rate to get folks off the fence.
Instead, a 6% mortgage rate will do it today, according to NAR.
Their economists say a 30-year fixed at 6% would make the median-priced home affordable for an additional 5.5 million households, including 1.6 million renters.
They believe about 10% of them would buy a home over the next 12 or 18 months if that were to happen. And guess what? NAR also expects the 30-year fixed to fall to, you guessed it, 6% in 2026.
We could also see another four million mortgage refinances if rates get back near 6%.
That’s not too far off, with the 30-year fixed close to 6.75% at last glance.
Of course, this is a moving target, and it seems like the magic number is always just above what prevailing rates are.
So it’s unclear if we’ll actually get there, or continue to exceed what home buyers will accept.
However, it is generally a positive to see that prospective buyers are coming to terms with mortgage rates being higher.
And with 2025 mortgage rate forecasts, including my own, calling a 30-year fixed near 6% by year end, it’s within reach.
The big question though is what will the economy look like at that point? Mortgage rates are important, but they aren’t everything.
If households are struggling with high prices on everyday expenses, insurance, taxes, etc., it might not matter how low mortgage rates go.
Before creating this site, I worked as an account executive for a wholesale mortgage lender in Los Angeles. My hands-on experience in the early 2000s inspired me to begin writing about mortgages 19 years ago to help prospective (and existing) home buyers better navigate the home loan process. Follow me on X for hot takes.
