New industry data suggests that more than half of prospective homebuyers have set 5.5% as their target mortgage rate, but current market conditions show a wide gap between expectations and reality.

A survey cited by the National Association of Realtors (NAR) on Friday found 56% of potential buyers are holding out for rates between 5.5% and 5.75% before making a purchase. Current rates, however, stand at 6.54% for a 30-year fixed mortgage, according to Freddie Mac, marking the fourth consecutive week of increases.

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The divergence between buyer expectations and market reality comes as existing home sales hit their lowest point since October 2010. According to NAR data, sales dropped to an annual rate of 3.84 million units in September.

The report says that rising interest rates remain the chief concern for buyers, with 58% citing them as their biggest fear. Home price increases ranked second at 49%, followed by inflation and diminishing savings at 40%.

“The continued strength in the economy drove mortgage rates higher once again this week,” said Sam Khater, Freddie Mac’s chief economist. “Over the last few years, there has been tension between a downbeat economic narrative and incoming economic data that is stronger than the narrative.”

The financial strain on potential buyers remains high. Recent Bankrate data shows 34% of workers living paycheck to paycheck. Meanwhile, the median existing-home price reached $404,500 in September, nearly 50% above September 2019 levels, outpacing income growth by 25% during the same period.

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At current rates, a $400,000 home purchase with 20% down translates to a $2,031 monthly mortgage payment, according to Jessica Lautz, NAR’s deputy chief economist. A 10% down payment pushes that figure to $2,285.

First-time buyers face challenges. Their market share fell to 26% in September, among the lowest levels on record. Loan officers report increased inquiries about down payment assistance and lower down payment programs as buyers seek ways to manage higher rates and prices.

Market forecasts suggest continued challenges ahead. Fannie Mae and the Mortgage Bankers Association project 30-year fixed rates to average around 6.2% by late this year, outpacing buyer preferences.

Limited inventory continues to pressure the market, with available homes down 20% compared to five years ago. “With mortgage rates back above 6.5% this month – and unlikely to drop below 6% this year – home prices will likely continue their consistent climb until more inventory comes onto the market in the spring,” Redfin senior economist Sheharyar Bokhari said.

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