Housing costs are so stretched that the housing slump continues—despite the recent slowdown

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Since peaking this year at 7.52% in April, the average 30-year fixed-rate mortgage, as tracked by Mortgage News Daily, has fallen, with the current rate at 6.37%.

Has this small improvement in prices (and housing availability) affected the housing market?

So far, the impact has been minimal.

Look no further than the Mortgage Purchase Application Index, the leading index of existing home sales, which is still hovering around a multi-decade low. This shows that existing home sales are still stagnant and hovering around a decade low—something that has been going on since the summer of 2022.

Why does the recent decline rate not encourage more buying activity? Real estate experts had a few different takes.

“It seems that deflation-like sentiment has taken hold of some domestic consumers,” Ali Wolf, Zonda’s chief economist, wrote in X on Wednesday. “Builders report reasonable traffic levels, but many prospective buyers say, ‘I know prices are going down, so I’ll wait.’

Nick Timiraos, chief economic reporter for The Wall Street Journalpointed to the purchase. “It is possible that we are worried about the group of people who can afford to buy given the affordability from the increase in prices in addition to the increase in prices,” Timiraos wrote in X on Wednesday. “Just because many markets have resisted the initial period of 7% rates does not mean that there are a lot of consumers who would continue to buy given their ability to buy even if they think/expect rates to go down in a few years.”

ResiClub’s view is that barring a significant improvement in home purchases, the recovery in existing home sales is likely to be slow—disrupted. High switching costs continue to pressure resale profits, as higher mortgage rates compared to pre-2022 levels make the prospect of trading a lower monthly payment/rate at a higher rate a major financial challenge.

Over time, if housing availability improves—whether through lower mortgage rates, lower prices, or higher wages—it will bring more sellers and buyers to the market, and increase sales of existing homes.

And as time goes on, life events such as expanding families or other important changes can act as incentives to reduce so-called switching costs. For example, a growing family may find the need for a larger home more pressing, making the financial and emotional aspects of moving more difficult. These life events can gradually reduce the cost of switching in the minds of borrowers.

Mortgage financing is one of the areas of the market that has seen some recent gains, as borrowers who received 7% or 8% rates over the past 18 months are taking advantage of the recent dip to get relief.

While this is not a refi boom—at least not yet—it is the outgrowth of a multi-decade recession during the subprime shock.

How low would the 30-year fixed mortgage rate need to go to really see a big change?

“To get a real refi boom? Need more shopping supply? 5.5% or less,” Gordon Miller, owner of Miller Lending, a mortgage lender based in Cary, NC, he tells ResiClub.