Finding The Sweet Spot: Why 5.5% Is The Magic Number For Mortgage Rates

When the Federal Reserve didn't raise interest rates last week, many believed it would help keep mortgage rates steady.

But that's not what happened. Instead, rates for a 30-year fixed-rate mortgage increased from 7.31% to 7.31% — their highest level since 2000, according to Freddie Mac.

"Unlike the turn of the millennium, house prices today are rising alongside mortgage rates, primarily due to low inventory," Freddie Mac Chief Economist Sam Khater said. "These headwinds are causing both buyers and sellers to hold out for better circumstances."

So what's the magic number?

In March, John Burns Research & Consulting found that 5.5% is the tipping point beyond which most consumers say they won't buy a home, and although rates have hovered between 6.5% and 7.5% since then, consumer attitudes haven't changed.

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Consumers have gotten used to low rates — most have mortgage rates below 4% after moving or refinancing when they hit record lows during the COVID pandemic. And 82% say they're not willing to give up their low rates to move.

For the week ending Sept. 23, the number of newly listed homes declined 7.5% compared to the same period a year ago, and the overall for-sale housing inventory fell short of levels from a year ago by 3.7%.

"Mortgage rates continued to cause many current homeowners to feel somewhat locked in, discouraging them from selling their homes, which, in turn, limits the availability of fresh new listings in the market," said Jiayi Xu, an economist at Realtor.com.

So what's so special about 5.5% mortgage rates? Mortgage rates stayed below 5% for 12 consecutive years when most borrowers bought or refinanced their homes. The John Burns survey found that 90% of current borrowers have a rate below 5.5%.

The John Burns survey also found that consumers can't afford mortgage payments at rates higher than 5.5%, which explains why homebuilders are succeeding with rate buydowns — prepaying for interest points, which can reduce monthly payments.

Many consumers are waiting for mortgage rates to drop to below 5.5%, and 88% think that will happen within the next five years, according to the John Burns survey.

"It's clear that the long-awaited ‘vibe shift' of consumers adjusting to higher mortgage rates hasn't happened yet," the John Burns report states. "Rates apparently must stay higher for longer to break the enchantment."

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