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2023 Mortgage Rates Could Stabilize Around 6%

With mortgage rates off highs, applications are revving up and down. So, what’s in store for the mortgage market?

Mortgage rates are trending downward and could continue to fall in the months ahead even though the Federal Reserve continues to raise the federal funds rate. Since the Fed started its upward trajectory on the Fed Funds rate in 2022, mortgage interest rates have increased dramatically from February 2022. In recent weeks, there have been slight decreases in the rate, which has caused a blip in mortgage originations.

On February 1, the Fed raised interest rates by a quarter of a percentage point while also signaling that more rate hikes were ahead. Fed Chairman Jerome Powell said at a news conference following the meeting that the “disinflationary process has started,” but he also signaled that future increases will be likely be needed.

The market indicators that suggest inflation is past its peak caused the average interest rate on U.S. home loans to drop to its lowest level since September 2022. According to data from the Mortgage Bankers Association (MBA), signs of an improving economy sent Treasury yields lower. According to Freddie Mac, the average 30-year fixed-rate mortgage rate is averaging near the 6.5% mark and 15-year mortgage rates are under 6%.

Mortgage Purchase Applications Fell 9% From the Previous Week

During the week ending January 27, mortgage applications fell 9% from the week earlier, according to a recent survey from the Mortgage Bankers Association (MBA).

“Mortgage rates declined for the fourth straight week and have now fallen almost 40 basis points over the past month,” said Joel Kan, the vice president of MBA and the group’s deputy chief economist.

The housing market is not experiencing a surge in inventory. According to Redfin, the number of active listings is about 21% higher than it was a year ago. That is mostly because homes sit on the market longer, with far fewer sales. New listings of homes for sale are down 22% year over year.

The MBA reported that the average contract rate on a 30-year fixed-rate mortgage fell by 13 basis points to 6.23% for the week ending January 13. Financial markets have been lifted recently by a string of data that shows inflation slowing, allowing the Fed to scale back its hefty interest rate hikes.

The Fed’s Latest Move Represents a Small Pull-Back

While the Fed did just raise rates, reports suggest it will slow the rate of increases thanks to new data that shows inflation retreated in December. Fannie Mae forecasted the average interest rate for a 30-year fixed-rate mortgage (FRM) to decrease steadily throughout this year, reaching 6% by the end of the year.

Fannie Mae also forecasted a possible rate cut in mid-2023. They predicted the federal funds rate would eventually peak at 4.9% and then start to fall later in the year.

For now, the Fed continues on its current course to impose further rate hikes this year. The GSE mortgage giants are notoriously accurate when it comes to long-term mortgage-rate predictions. According to Fannie and Freddie, interest rates could increase before going back down.

Although High Right Now, Rates Have Historically Been Much Higher

 While this may seem high compared to last year, it is significantly lower than historical averages. The highest rate ever recorded for mortgage interest rates was 18.45% in 1981, according to Freddie Mac. The lowest average mortgage rate in history was recorded at 2.68% in 2020. In 2019, before the Covid-19 global pandemic, the average mortgage rate hung near 4% for most of that year.

So, while mortgage rates are low (historically), there’s still the psychological element that some homebuyers are contending with as they know they missed the best rates (ever) and have remorse, which could be a factor in current demand reduction. However, over the next four to six months, as the “shock” of the recent, sudden rate rises move into “acceptance,” a 6%+/- rate could become the new normal and bring more homebuyers into the market as rates would become in line, if not lower, with rates year over year. This acceptance could spur more homebuyers to come off the sidelines and potentially spur mortgage applications.