Four years after mortgage rates rebounded from their lows during the COVID-19 pandemic, the national housing market remains stagnant. However, an “opening” is on the horizon for a select group of metros across the Midwest and South if borrowing costs continue to decline.
The average 30-year mortgage rate fell to 6.01% on Thursday, a three-year low that is beginning to close the “rate gap” for sellers and restore purchasing power to consumers.
Researchers at Realtor.com® have analyzed the latest real estate data to identify local markets where buyers and sellers alike will see significant and immediate gains from mortgage rates.
To do that, they focus on three factors: the current high cost of borrowing; small payment gaps (the difference between a homeowner’s existing mortgage and the cost of a new loan today); and areas where sales activity has been sluggish recently.
“The closer the market’s mortgage rates are to the interest rates on outstanding loans, the more the real estate market will ‘open up,’ so to speak,” explained a senior economist at Realtor.com. Jake Krimmel.
In fact, a market where the average homeowner has a mortgage rate of 4.3% is more likely to be open than one where the average rate is 3.5%. The small gap between their current rate and today’s 6.01% lowers the financial barrier to travel.
While the national median for outstanding mortgages sits between 3% and 4%, homeowners in the five largest metros—Detroit, Cleveland, Memphis, TN, Jacksonville, FL, and Dallas—hold rates as high as 4.1% to 4.3%, which puts them a little closer to today’s market rate.
“While it’s unlikely we’ll see mortgage rates on that list for some time, every approach counts,” Krimmel added.
Cleveland’s real estate market is ready to open
Mike ValerinoThe CEO of the Akron Cleveland Association of Realtors, tells Realtor.com that prices below 6% represent the psychological and financial tipping point for Cleveland’s sidelined buyers and sellers who are ready to re-enter the market.
“The reason Cleveland has been able to open faster than other major metros is affordability,” he explains. “Our median house price is well below coastal markets, so even a 1 percent rate drop significantly increases purchasing power.”
Cleveland is in the heart of the Midwest, where high interest rates are particularly depressing new listings with a lock-in effect through 2022, according to the latest real estate report from Realtor.com.
Previous modeling has shown that if rates drop from 7% to 6%, more than 43,000 additional households in the Cleveland metropolitan area could afford a median-priced home, significantly increasing sales activity.
“In high-cost markets, rate cuts don’t move the needle dramatically because price levels remain a major burden,” added Valerino. “In Cleveland, prices are a barrier.”
According to Valerino, many homeowners in Northeast Ohio are sitting on significant equity and delaying sales because they don’t want to give up a 3% mortgage, which represents a textbook example of the “lock-in effect.”
“When prices soften, the first wave is usually up-and-coming buyers—homes that need more space or a lifestyle change but are foreclosed,” he said. “That moving job creates opportunities for the first home because everything that is done usually frees up another home.”
Cleveland’s median homebuyer’s income is about $88,700, and the median listing price in January stood at just $247,115, well below the national average, keeping homeownership within reach of the average home.
If prices fall as inventory rises, Valerino expects the Cleveland market to melt. The resulting increase in listings and sales—combined with a slower pace of price growth—could eventually allow renters to buy and foreclosed owners to trade up.
Cleveland and the other four markets on the list boast below-average down payment gaps, which means less moving costs to buy the average home. As mortgage rates fall, that gap narrows. This means that transportation costs are lower and raises the possibility of higher inventory levels and sales.
Location is important in Dallas
in dallas, Harrison Polskydirector of development and sales at Catēna Homes, says it’s less about the number and more about the location.
“Sellers know very well that once they’re out of a neighborhood, it’s hard to buy again,” Polsky told Realtor.com. “A movement is successful when the improvement of lifestyle, location, or long-term value is clearly meaningful and not merely incremental.”
And while the reduction in mortgage rates is expected to open up inventory, Polsky says it’s more likely to come from sellers stepping up than affordable first homes.
“Entry-level houses are still provided properly,” he emphasized. “What we would expect to see is more activity in the middle and upper price ranges, while the more desirable, established areas remain strong and competitive.”
What to do with opening prices remains an open question that will largely depend on how ready the market is to sell, according to Krimmel. Metros with very strong assets are expected to benefit from sellers stepping out and listing their homes, and in doing so, cooling the price pressures associated with low interest rates.
In more balanced metros, opening new inventory will likely have a modest effect on prices.
“In these areas, the large opening will increase the volume and sales in the market. But because the house owners come to the side and add both the house on the supply side and the buyer on the demand side, that will lead to no real impact on house prices one way or the other,” said the economist.
That’s the dynamic Polsky expects to see in Dallas, where he says many sellers are buyers.
“More inventory tends to create a balance rather than a drop in prices,” he said. “Demand, especially from local buyers with a lot of money and moving in, is taking new listings quickly.”
Detroit’s hyperlocal market
Erica Collica Swinkassociate broker at Detroit-Max Broock Realtors, says for his clients in Detroit, deciding to move comes down to simple math: They’ll list their homes if they can get enough money to pay off their mortgage, put down 20% on their next place, and have enough to keep a healthy deposit.
Swink tells Realtor.com that Detroit’s open market may look fragmented, with much of the inventory consisting of mid-size and fixer-uppers, rather than desirable turn-around homes in historic neighborhoods.
“I don’t expect a flood of polished, move-in ready homes under $300,000 in very desirable packages,” he notes. “Those are always scarce and competitive.”
Swink adds that in Detroit, the inventory is hyperlocal and hyperneighborhood-specific.
“Detroit’s buyer pool right now is educated and making decisions,” the agent said. “They don’t throw money blindly, but they will pay for quality and location.”
