Mortgage rates have fallen to a 15-month low, but one expert warns a bigger drop is needed to revive the frozen housing market.
According to the ‘Oracle of Wall Street’ Meredith Whitney, interest rates must fall below 6 percent.
Once interest rates are within 5 percent, buyers often feel encouraged and feel it is worth taking the plunge.
Whitney, who earned her nickname after predicting the global financial crisis, said house prices would also need to fall by a tenth to make a meaningful difference to affordability.
According to her, mortgage rates have been high for decades and house prices are at record highs, making the average mortgage payment this year twice as high as it was in 2000.
Meredith Whitney said mortgage rates need to be 6 percent or lower to revive frozen market
According to figures from Freddie Mac dated August 8, the average 30-year fixed-rate mortgage rate fell to 6.47 percent this week.
This was the biggest drop so far this year, down from 6.73 percent the week before.
Rates are now lower than they have been since mid-May last year.
A predicted rate cut by the Federal Reserve in September is likely to send prices lower even further.
Increased rates have kept buyers on the sidelines. They have also deter potential sellers from putting their home on the market.
Millions of Americans are locked into lower interest rates on existing loans and don’t want to be forced into a more expensive mortgage when they move.
“Mortgage rates fell to their lowest level in more than a year this week, reflecting a likely overreaction to a less favorable jobs report and financial market turmoil, while the economy remains on solid footing,” said Sam Khater, chief economist at Freddie Mac.
‘The drop in mortgage rates increases the purchasing power of potential home buyers and should arouse their interest in moving.’
While this decline is welcome, Whitney, CEO of Meredith Whitney Advisory Group, believes a bigger shift is needed to bring about real change in the market.
“If mortgage rates fall below 6 percent, you will see a spike in both mortgage lending and house sales,” she told DailyMail.com.
“As more volume enters the market, prices fall and the cycle continues to perpetuate itself.”
According to her, prices must fall by at least 10 percent, and mortgage rates must also be reduced, so that the market becomes affordable for new home buyers.
In recent years, the housing market has become increasingly unaffordable for millions of Americans.
Since 2020, mortgage rates have more than doubled, Whitney said, and average home prices have risen 33 percent.
This has resulted in a 101 percent increase in monthly repayment and interest payments for new homeowners.
In some cases, this would mean that mortgage payments for homeowners would still increase even if they bought a cheaper home.
‘With wage growth at just 22.6 percent, it’s no wonder homebuyers are still sitting on the sidelines.
“Even if buyers can make the required down payment, the monthly costs of owning a home are out of reach for many potential homebuyers.”
She predicts that house prices will fall once the housing market starts moving again, but that could take months or longer.
“Meanwhile, modest declines in mortgage rates could make second mortgages and home equity lines of credit more attractive to increasingly cash-strapped homeowners,” Whitney added.
For the first time in 15 years, consumers struggling financially are starting to tap into the equity in their homes, she said.
With a home equity mortgage, also known as a home equity loan or second mortgage, homeowners can borrow money based on the value of their home.
The value of a home is the difference between the market value and the outstanding balance of your mortgage.
According to Redfin, the total value of the U.S. housing market has grown by 6.6 percent over the past 12 months, with homes increasing in value by a whopping $3.1 trillion to a record $49.6 trillion.
According to figures from Freddie Mac on August 8, the average 30-year fixed-rate mortgage rate fell to 6.47 percent this week
“If mortgage rates fall below 6 percent, you will see a spike in both mortgage originations and home sales,” said Meredith Whitney
About 72 percent of the 5,000 potential home buyers said it would be feasible to pull the trigger if mortgage rates fell below 5 percent
“The decline in mortgage rates increases the purchasing power of potential home buyers,” said Sam Khater, chief economist at Freddie Mac
Whitney previously said the Federal Reserve would need to cut rates by 75 to 100 basis points to have a real impact on mortgage rates.
This would cause interest rates to fall below 4 percent, from the current level of 5.25 percent to 5.5 percent.
After an aggressive campaign of rate hikes, the central bank has kept interest rates at this level since July 2023, the highest level in 23 years.
This in turn has helped keep mortgage rates high.
Benchmark borrowing costs do not directly affect mortgage rates, but mortgage costs will fall if banks expect interest rates to be lowered in the future.
Mortgage rates follow the pattern of 10-year Treasury yields, which are determined by a number of factors, including inflation, economic growth and the Fed rate.
A weak jobs report on August 2 and a stock market drop on August 5 mean that markets are pricing in a rate cut in September, but economists are still uncertain how big the drop will be.
Whitney’s comments follow a survey earlier this year that found most potential homebuyers are waiting until interest rates fall even further — below 5 percent — to purchase a home.
A realtor.com questionnaire A survey of 5,000 Americans last November, when rates were above 7 percent, found that only 18 percent of people were waiting for rates to drop below 7 percent.
The survey found that 22 percent of respondents would buy a home if interest rates fell below 6 percent.
But once interest rates dropped below 5 percent, 72 percent of people said it would be feasible to buy a home.