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- If mortgage rates hit 5%, the market could unfreeze and prices may fall, DoubleLine said in a note.
- Lower rates will bring homeowners back to the market, fueling inventory volumes.
- Others have said falling mortgage rates will lead to surging demand and keep prices high.
If mortgage rates can continue to drop and fall to the 5% level, that would unfreeze the US housing market and even cause prices to fall, DoubleLine Capital's Ken Shinoda wrote in a note last week.
"There is a magic number for fixed mortgage rates that I think would unfreeze the housing market - in other words, a price bringing together willing buyers and sellers, a market-clearing price," the analyst wrote. "By my lights, that number has a 5% handle."
Reaching this figure has grown increasingly realistic over recent months, as the 30-year mortgage rate has finally started sliding from near-8% levels that it hit in October for the first time since 2007.
Since then, the rate on the most popular US home loan has fallen to 6.67%, sparking a resurgence in housing-market activity. As rates have slid, Redfin noted a double-digit jump in the number of homeowners contacting real-estate agents last week, while buyer interest also shows signs of climbing.
But Shinoda's outlook that a fall to this magic number for mortgage rates will also lead to lower prices bumps up against long-standing projections on Wall Street, which broadly follow the premise that home values move inversely to mortgage rates.
The S&P Dow Jones Indices group expects existing properties to appreciate on account of falling rates next year, while a Fannie Mae survey outlined a 2.4% price rise for similar reasons.
Shark Tank star Barbara Corcoran recently summed up why this could happen, arguing this month that homebuyers should not wait around for mortgage rates to fall lower:
"The whole world's going to be out there competing with you," she said. "You'll be paying more for your home."
But such a simple-seeming relationship between rates and home prices is naive, Shinoda said, emphasizing the importance of supply in the equation.
After all, home prices did not drop as mortgage rates rose in the past year, given a decade of underbuilding that has left the housing market in a deep supply crunch. This was made worse as homeowners remained off the market, unwilling to give up their sub-5% rates they locked in before the big jump in 2022.
But in his view, 5% rates are a level at which homeowners are comfortable returning to the market. The volume of existing homes for sale that this would bring back would be sufficient to meet demand, ensuring that home prices at least stay flat.
"In today's context of frozen inventories, lower rates can potentially revive transaction activity and softener stubborn prices," he said. It may even lead to a rebound in new-home construction, Shinoda added.
However, it remains to be seen whether mortgage rates keep falling at a brisk pace, and most analysts expect the 30-year mortgage to hover in the 6%-7% range through 2024.