The key to revitalizing the US housing market and enabling a drop in property prices lies in achieving a specific threshold for mortgage rates, as proposed by Ken Shinoda of DoubleLine Capital. In his recent analysis, Shinoda suggests that a reduction of mortgage rates to around 5% could serve to spur the housing market, establishing a balance between eager buyers and sellers.
This target rate, which Shinoda describes as a "market-clearing price," has become increasingly attainable, given the recent downtrend in 30-year mortgage rates from their near-8% peak in October - a level not seen since 2007. The rate for the most common US home loan has already decreased to 6.67%, reinvigorating housing market activity. Real estate company Redfin has observed a significant increase in homeowner inquiries to agents, alongside rising buyer interest.
However, Shinoda's prediction that lower mortgage rates will lead to a decrease in home prices challenges the prevailing Wall Street view, which typically posits an inverse relationship between mortgage rates and home values. For instance, the S&P Dow Jones Indices group expects existing home values to appreciate due to falling rates next year, and a Fannie Mae survey predicts a 2.4% rise in prices for similar reasons.
Barbara Corcoran, a prominent figure in real estate and a "Shark Tank" star, recently advised against waiting for further rate drops, cautioning that such delays could lead to increased competition and higher home prices.
Shinoda, however, argues that this perceived straightforward correlation overlooks the critical factor of housing supply. He notes that despite rising mortgage rates over the past year, home prices did not decrease, largely due to a decade-long underbuilding that has resulted in a significant supply shortage. Additionally, many homeowners have been reluctant to sell, preferring to retain their sub-5% rates secured prior to 2022's rate hike.
Shinoda believes that a return to 5% mortgage rates would encourage homeowners to re-enter the market, leading to an increase in the volume of available homes that would be sufficient to satisfy current demand and stabilize prices.
Furthermore, Shinoda suggests that lower rates could reignite transactions in the housing market and ease stubbornly high prices. This shift could also potentially spark a resurgence in new-home construction. However, the trajectory of mortgage rates remains uncertain, with most analysts expecting the 30-year mortgage rate to remain between 6% and 7% through 2024.
