Will Mortgage Rates Drop in 2023?

  • With Jerome Powell recently laying out expectations for further rate hikes, mortgages have been in focus.
  • Mortgage rates have been more than double last year’s pandemic level for much of the year.
  • Going forward, many expect the Federal Reserve to play a major role in whether mortgage rates fall or remain elevated.
will mortgage rates drop in 2023 - Will Mortgage Rates Drop in 2023?

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Mortgage rates have been on every investors mind this year and for good reason. As housing prices have climbed alongside interest rates, 30-year fixed mortgage rates rose from their pandemic level of 2.68% to as high as 6.3%. That’s more than double many projections. Going forward, the question remains: Will mortgage rates drop in 2023?

Well, depending on who you ask, it’s very possible. Mortgage rates have soared this year largely in response to rapidly rising interest rates. The Federal Reserve has already raised rates four times, often by as much as 100 or 75 basis points. The Fed will likely raise rates at least one more time before the year’s end. What comes after that, however, is largely a question mark.

Should inflation ease, it’s likely the Fed will step off the gas of its hawkish monetary policy, which could result in mortgage rates falling back down. Last month’s consumer price index (CPI) report showed no month-over-month price increase, leading some economists to conclude inflation is easing even faster than expected.

Unfortunately, as per Fed Chair Jerome Powell’s recent Jackson Hole speech, the central bank is a bit less convinced: “While the lower inflation readings for July are welcome, a single month’s improvement falls far short of what the Committee will need to see before we are confident that inflation is moving down.”

Will Mortgage Rates Drop in 2023? Experts Weigh In.

Depending on who you ask, the likelihood of mortgage rates dropping varies wildly. According to Fannie Mae, 30-year fixed mortgages are likely to fall to an average of 4.5% in 2023, down from the 5.55% level recorded this past June.

This would offer significant relief to would-be homebuyers, who are pinched by the current elevated rates and prices. Mortgage rates are a sensitive metric. Even small changes can yield substantial differences in total payments when evaluated over the course of a mortgage. For example, a homeowner with a 3.5% fixed rate for a $300,000 mortgage will pay almost $130,000 less at the end of their loan than the homeowner with a 5.5% mortgage rate.

Not everyone agrees, however. In July, Lien Kiefer, an economist at Freddie Mac, told Insider he believes mortgage rates aren’t likely to fall until late 2023, maybe even 2024. Kiefer believes the Fed will likely continue to hike rates through most of the year, which will only put upward pressure on mortgages. “I would not be totally shocked if in the next five years we were to hit a new low. But certainly most forecasts and economists are expecting that we won’t reach that low in the near term,” Liefer said.

It is possible that at some point next year, the Fed will reverse course and begin lowering borrowing rates in order to pick up an artificially slowed economy. Indeed, some economists are holding out hope that the Fed’s monetary tightening will yield results faster than expected. If prices ease, the Fed may even lower rates back down to encourage spending, which would likely ease mortgage rates with it.

On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.


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