Mortgage Interest Rates Forecast 2023: Will Rates Drop?
Mortgage rates have risen since the start of last year, reflecting investors' concerns that the economy is heating up and that the Fed will cool it down and reign in inflation. U.S. Treasury bond rates, which mortgage rates follow, encountered two tough patches this year: in late February, when Russia invaded Ukraine, and in mid-May when investors worried about poor consumer spending. Bond yields and mortgage rates declined throughout these times.
The Federal Reserve does not determine mortgage rates, and the central bank's choices do not have the same direct impact on mortgage rates as they have on other products such as savings accounts. The Fed does, however, determine borrowing costs for short-term loans in the United States by changing the federal funds rate. The federal funds rate can have an impact on 10-year Treasury bond yields, which are used to calculate most mortgage rates.
Essentially, the Fed does not set mortgage rates directly, but its policies can affect the financial markets and movers who do. Most analysts predict that mortgage rates will continue to rise given the inflation numbers continuing to increase. Since mortgage rates are tied closely to the performance of the 10-year Treasury market plus a margin to account for the additional riskiness of home lending. The long-term mortgage rates are expected to rise due to the overall turmoil in the world’s economy.
Also Read: How To Invest in Mortgage Estate Notes?
The mortgage market has seen a surge in activity with a 27.9% increase in mortgage applications in the week ending January 13th, 2023 according to the Mortgage Bankers Association's Weekly Mortgage Applications Survey. Refinance activity has risen 34% from the previous week, while the Purchase Index has increased by 25%. Despite this growth, refinance activity remains 81% lower than in the same week last year and purchase activity remains 35% lower.
Mortgage rates have now reached their lowest level since September 2022, about a percentage point below the peak rate last fall. The spring buying season is about to begin, and lower mortgage rates and an increase in the number of homes on the market will benefit first-time homebuyers. In the week ending January 20th, refinance applications rose 14.6% and home purchase applications rose 3.4%.
Despite the increase in demand, compared to last year, refinance activity is still 81% lower, and purchase activity is down 35%. The average 30-year fixed mortgage rate is currently 6.13% after steadily decreasing over the past three weeks. Forecasts for mortgage rates in 2023 vary, but December's inflation data suggests the Fed's efforts are working. The consumer price index could continue to fall, leading to a decrease in mortgage rates in 2023.
However, services inflation has increased, and the Fed has indicated that it will continue with rate hikes, though slower 25 basis point increases are expected. Despite uncertainties, economists are optimistic that the Fed will get inflation under control without causing a recession. Unemployment remains low, and there are more job openings than unemployed Americans, even as rate hikes are causing a contraction in economic activity and inflation begins to slow.
According to the U.S. Department of Housing and Urban Development, the national median family income for 2022 is $90,000, and the median price of an existing home sold in December was $366,900, according to the National Association of Realtors. Based on a 20% down payment and a 6.42 percent mortgage rate, the monthly payment of $1,840 is equal to 25% of the average family's monthly income.
The median family income was $79,900 a year ago, the median home price was $364,600, and the average mortgage rate was 3.4 percent. Buying a typical home back then required only 19% of a family's monthly income. In conclusion, mortgage demand has increased in recent weeks, but activity is still below last year's levels. Mortgage rates have reached their lowest level in months, and economists are optimistic about the future of the housing market.
Nevertheless, uncertainties remain and forecasts for 2023 vary. High mortgage interest rates imply you pay more interest, which can lower your purchasing power because you can't borrow as much money. This is because less money will be paid toward the principal (the amount borrowed) and more money will be paid toward the interest. Higher interest rates may assist in reducing the housing demand that is now driving up prices. If you're looking to buy a home, keep an eye on the local market and consider locking in your rate when you're ready to go.
It's also important to remember that just because you qualify for a certain amount doesn't imply you should borrow the maximum. Spend some time calculating how much house you can afford, including monthly payments. Work with your lender to calculate your monthly mortgage payment based on different loan amounts and interest rates.
Mortgage Rate Predictions 2023
Mortgage experts see rates decreasing over the coming year as the economy slows. Lawrence Yun, the chief economist of the National Association of Realtors, said he expects rates to fall to 5.5 percent by mid-2023. Fannie Mae sees the average rate of a 30-year fixed getting to 6.8% in 2023. Meanwhile, the prediction from Freddie Mac is 6.4%.
According to an updated prediction from the Mortgage Bankers Association as well, mortgage rates are also anticipated to fall in 2023, MBA economists also predicted that the United States would enter a recession in the first half of next year, owing to tighter financial conditions, reduced business investment, and slower growth globally. According to their mortgage rate prediction, this will raise the unemployment rate from 3.5% to 5.5% by the end of 2023.
“Next year will be particularly challenging for the US and global economies,” said Mike Fratantoni, chief economist and senior vice president for research and industry technology. “The sharp increase in interest rates this year – a consequence of the Federal Reserve’s efforts to slow inflation, will lead to an equally sharp slowdown in the economy, matching the downturn that is happening right now in the housing market.”
However, the good news for homeowners is that mortgage rates are projected to fall next year, according to Fratantoni. According to MBA, mortgage rates will conclude in 2023 at roughly 5.4%. According to Freddie Mac, the average rate for a 30-year fixed-rate mortgage is currently 6.94%. Fratantoni warned that mortgage rates will remain volatile in the coming months because the Fed is projected to continue raising interest rates this year.
According to the forecast, the Fed's continuous attempts to contain inflation will eventually limit homebuyer demand for mortgages in 2023. Mortgage origination volume is expected to decline to $2.05 trillion in 2023 from the $2.26 trillion expected in 2022, according to MBA. The forecast calls for purchase mortgages to drop by 3% next year, while refinance volume is anticipated to decline by 24%. The slowdown in housing activity and higher mortgage rates will cut the pace of home price growth, according to MBA. The forecast projects national home prices to be roughly flat in 2023 and 2024.
Will Fed Increase Interest Rates in 2023?
Fed officials predicted in December that rates would rise to just above 5% in 2023, then remain high throughout the year. However, incoming data will determine how high the Fed raises rates in 2023 and how long it keeps them there.
Let's look at the timeline for the Fed raising its benchmark interest rate in 2022. In March 2022, it raised its federal funds benchmark rate by 25 basis points to a range of 0.25% to 0.50%. The Fed raised interest rates for the first time since 2018. The Federal Reserve announced in early May 2022 that it would raise the federal funds rate target range to between 0.75% and 1%.
The Federal Reserve has announced that it will sell Treasury and mortgage-backed securities in order to reduce the size of its balance sheet. To combat the sustained rise in inflation, the Fed raised the interest rate by 75 basis points, or 0.75%, in June 2022. This increase pushed the target rate range up from 1.5% to 1.75%, the largest single rate increase since 1994.
Following the release of the Consumer Price Index, which showed annual inflation of 9.1%, the Fed raised interest rates by 0.75% to a target range of 2.25% – 2.5% in July. Fed officials have stated that they want to see several month-to-month inflation rates annualize to less than 3% before becoming less hawkish and considering a pause in rate hikes. Treasury yields have risen across the yield curve, with the two-year rate rising by up to 21 basis points to around 3.78%, the highest since October 2007.
This is expected to reduce inflation, but it will also likely raise interest rates for borrowers. With inflation remaining stubbornly high, the Federal Reserve raised the target range for the federal funds rate by 0.75% in September, to 3%-3.25%. The Federal Reserve also released median forecasts, indicating that the target rate will be 4.4% by the end of 2022.
During its September meeting, the Fed raised the federal funds rate by 75 basis points to the 3%-3.25% range, the third consecutive three-quarter point increase, pushing borrowing costs to their highest level since 2008. It increased interest rates once more in November, bringing the federal funds rate to a range of 3.75% to 4%.
On Dec 14, 2022, the Federal Reserve raised the federal funds rate by 50 basis points, a reprieve from several other higher rate hikes in 2022. When you call a 50-basis-point rate increase a reprieve, you know the bar has been set low, but that's what seven Fed rate hikes in a year will do to a country. In order to keep inflation under control, the Federal Reserve raised the federal funds rate by 75 basis points four times in 2022, following two smaller increases.
Increasing the fed rate makes credit more expensive for consumers and businesses, and it is one of the Fed's only tools for combating inflation. The final increase for the year came on December 14, 2022 (+50 bps), mirroring the increase in May. The current federal funds rate is 4.25%-4.50%. It's unclear whether the Fed's interest-rate policy is working to keep inflation under control. However, there are signs that things are moving in the desired direction of the Fed in some areas, but not all.
The rate of inflation has slowed. According to the most recent Consumer Price Index report, the index, which measures price changes across a basket of consumer goods and services, fell 0.1% in December after increasing by the same amount in November. The index is up 6.5% over the last 12 months ending in December, down from 7.1% in November. It demonstrates that the hot inflation that persisted for much of last year is beginning to cool.
Mortgage Interest Rate Weekly Trends 2023
For Tuesday, January 31, 2023, the current average 30-year fixed mortgage rate is 6.44%, falling 3 basis points compared to this time last week. If you're in the market for a mortgage refinance, today's national 30-year fixed refinance rate is 6.47%, decreasing 8 basis points over the last seven days, according to the Bankrate’s national survey of large lenders.
Over the past 52 weeks, the benchmark 30-year fixed-rate mortgage has averaged 5.75 percent. A year ago, the 30-year fixed rate mortgage was 3.71 percent. Four weeks ago, the rate was 6.74 percent. The 30-year fixed-rate average for this week is 2.68 percentage points higher than the 52-week low of 3.76 percent.
Fed's actions don’t directly drive fixed mortgages’ moves, but the Fed does sway 10-year Treasury yields — which are strongly correlated to mortgage rates. Some analysts believe fixed mortgage rates will fall below 6 percent in 2023 as a recession looms.
3-month trend | 30-Year Fixed Rates | 15-Year Fixed Rates | 10-Year Fixed Rates | 5/1 ARM Rates |
---|---|---|---|---|
1/27/2023 | 6.43% | 5.65% | 5.63% | 5.42% |
1/20/2023 | 6.36% | 5.63% | 5.72% | 5.41% |
1/13/2023 | 6.46% | 5.85% | 6.01% | 5.50% |
1/6/2023 | 6.52% | 6.06% | 6.22% | 5.50% |
12/30/2022 | 6.59% | 5.95% | 5.89% | 5.45% |
12/23/2022 | 6.47% | 5.83% | 5.74% | 5.45% |
12/16/2022 | 6.60% | 6.00% | 6.11% | 5.46% |
12/9/2022 | 6.52% | 5.91% | 5.99% | 5.45% |
12/2/2022 | 6.67% | 6.04% | 6.07% | 5.48% |
11/25/2022 | 6.81% | 6.16% | 6.26% | 5.51% |
11/18/2022 | 6.84% | 6.22% | 6.35% | 5.54% |
11/11/2022 | 7.24% | 6.46% | 6.56% | 5.62% |
11/4/2022 | 7.23% | 6.45% | 6.67% | 5.53% |
10/28/2022 | 7.20% | 6.43% | 6.67% | 5.55% |
10/21/2022 | 7.20% | 6.43% | 6.59% | 5.44% |
10/14/2022 | 7.08% | 6.28% | 6.33% | 5.37% |
10/7/2022 | 6.89% | 6.07% | 6.12% | 5.34% |
9/30/2022 | 6.82% | 5.97% | 6.07% | 5.20% |
9/23/2022 | 6.43% | 5.66% | 5.78% | 4.84% |
9/16/2022 | 6.19% | 5.51% | 5.61% | 4.63% |
9/9/2022 | 6.08% | 5.33% | 5.46% | 4.52% |
9/2/2022 | 5.95% | 5.18% | 5.25% | 4.42% |
Sources
- https://www.mba.org/
- https://www.bankrate.com/mortgages/rate-trends/
- https://www.bankrate.com/mortgages/mortgage-rates/
- https://www.forbes.com/advisor/mortgages/mortgage-interest-rates-forecast/
- https://themortgagereports.com/32667/mortgage-rates-forecast-fha-va-usda-conventional