Mortgage rates predictions are running hot lately as 30-year fixed rates take a surprising downward turn. Indeed, the 30-year is down to 6.4% despite an increasingly hawkish monetary environment. What’s going on with mortgage rates lately? And what can you expect going forward?
Mortgage rates have been perhaps the single most impactful symptom of the Federal Reserve’s monetary tightening. Indeed, as the central bank raised the federal funds rate from near 0% to its current 4.5% level over the course of last year, mortgage rates have soared close to 8% at times. Reasonably so, when the federal funds rate rises, so too does the 10-year Treasury yield, which mortgages tend to closely track.
Housing has long been considered the most rate-sensitive injury — and for good reason. As mortgage rates rise, housing demand usually plummets as many potential buyers are priced out of the market. This is exactly what happened for most of 2022. According to the National Association of Realtors, existing home sales fell 7.7% in November 2022 compared to the year prior.
Interestingly, however, things aren’t quite so grim right now. Mortgage rates have eased down somewhat, leaving some investors scratching their heads. What’s behind the fall in mortgage rates?
Cooling Economy Pushes Mortgages Lower
The recent dip in mortgage rates has come to the surprise of economists and analysts. According to many analysts, the fall in mortgage rates is a consequence of growing signs that the economy is starting to cool off.
At its last rate hike in mid-December, the Fed admitted to a few important things — chiefly, that inflation is starting to fall. As a result, the central bank will likely opt for smaller rate hikes in the new year. Add in recent data releases that show notable slowdowns in both consumer spending and wage growth and it’s no surprise notions of a tightening economy dominate the narrative. This sentiment has likely fueled the dip in mortgage rates.
According to Karan Kraul, a housing finance researcher at the Urban Institute, macro headwinds have shifted the mortgage market:
“It depends on what the market outlook for the future of the economy at large is […] Most mortgages made in the U.S. end up being bundled and securitized into investment products, bonds that are eventually sold to investors across the world.”
As such, when inflation and other macro indicators came in better than previously projected, a number of banks jumped onto mortgages anticipating kinder monetary action from the Fed as it pertains to rate hikes.
With mortgage rates easing down, housing demand has started to return somewhat. Mortgage applications — which reached their lowest volume in more than two decades last year — have picked up in the past month or so. Whether this is a flash in the pan or evidence of a softening housing market is still unclear.
Mortgage Rates Predictions 2023
While not everyone is in agreement over the course of the economy this year, mortgage rate predictions are clearly shifting lower.
The Mortgage Bankers Association (MBA) projects that the 30-year fixed rate will be at a modest 5.2% by the end of 2023. This is, by all accounts, an optimistic prediction given current expectations that the Fed will continue raising rates for at least part of the new year.
Meanwhile, mortgage sector analyst Bose George is a bit more cautious with his hopes for mortgages in 2023:
“Our baseline is not for the Federal Reserve to cut rates next year […] Spreads could tighten a little bit, and then maybe you get a mortgage rate that’s 5.75% to 6% something, which will be a slightly positive benefit to the market, but not much.”
Some are a bit more pragmatic as it pertains to mortgage rates, however. “I think we’ll be hovering around 6% to 8% for a little while. I don’t see any major items that would cause rates to drop in 2023,” said Alex Elezaj of United Wholesale Mortgage. Elezaj told HousingWire:
“Nobody has the crystal ball to know, but we are making sure that as the next refi opportunity comes, our wholesale brokers have the tools in place to execute for their borrowers.”
Heading further into 2023, mortgage rates may well be the metric to watch to gauge the state of the greater economy. Whether mortgage rates climb in the face of further rate hikes, or continue to ease down, remains to be seen.
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.
