2023 Mortgage Forecast: Rates Expected to Decline

Mortgage rates are widely expected to fall this year as inflation recedes and the U.S. economy prepares for the possibility of a modest recession, according to some of the nation’s leading real estate economists. This comes after mortgage rates saw record-breaking annual gains in 2022.

Relatively lower mortgage rates could bring homebuyers who were priced out last year back to the table, but forecasters say that housing affordability will remain a top concern. Although higher borrowing costs have weakened homebuying demand, home prices are propped up by a longstanding supply shortage. And even with inventory expected to improve in the coming months, housing supply still sits well below pre-pandemic levels.

Here’s where mortgage rates are headed in 2023 and how that will impact the housing market as a whole.

[Read: Best Mortgage Lenders.]

Mortgage Rate Predictions for 2023

Fannie Mae: 6.3%

The latest monthly Housing Forecast from Fannie Mae has the average 30-year fixed rate declining from 6.5% in the first quarter of 2023 to a flat 6% by the end of the year.

“We expect housing to continue to slow, even though mortgage rates have come down recently,” Doug Duncan, Fannie Mae’s senior vice president and chief economist, says in a Dec. 19 statement. “Home purchases remain unaffordable for many due to the rapid rise in rates over the last year and the fact that house prices, though certainly slowing and in some places declining, remain elevated compared to pre-pandemic levels.”

Freddie Mac: 6.4%

Freddie Mac’s most recent Quarterly Forecast, released in October 2022, is pretty much in line with Fannie Mae’s predictions. The mortgage giant puts the 30-year mortgage rate between 6.6% and 6.2% throughout 2023, with an average annualized rate of 6.4%.

“Mortgage rates generally follow 10-year Treasury yields, which would indicate that rates should be flat given the path of Treasurys. However, in recent months the spread between the primary mortgage rate and 10-year Treasurys has widened as the mortgage industry adjusted to dramatically lower transaction activity and recent interest rate volatility,” the forecast said. “If spreads gradually return closer to historical averages, then mortgage rates will decline modestly over the next year.”

Mortgage Bankers Association: 5.7%

MBA’s December 2022 Mortgage Finance Forecast puts the 30-year fixed mortgage rate at 6.2% in the first quarter of 2023, gradually falling to 5.2% by year-end. Joel Kan, MBA’s vice president and deputy chief economist, estimates that rates will average 5.7% throughout the year.

“You might have some weeks or some months where things might buck the trend,” Kan says. “You might see a month or two where rates may come up because something happens in the market. The baseline is one thing, but there’s always some room for surprises.”

National Association of Realtors: 5.7%

Nadia Evangelou, NAR senior economist and director of forecasting, says that the 30-year fixed mortgage rate will likely average 5.7% this year, stabilizing below the 6% threshold in the spring and summer months.

“It seems that mortgage rates may have peaked,” Evangelou says. “After surpassing the 7% threshold … rates are finally moving down as inflation is cooling. In fact, two of the main factors affecting today’s mortgage market have turned recently more favorably for mortgage rates. Inflation continues to ease while the Federal Reserve has switched to smaller interest rate hikes.”

Realtor.com: 7.4%

Realtor.com’s Housing Forecast for 2023 has the highest mortgage rate predictions, with the average 30-year fixed rate hovering above 7% throughout the year. Danielle Hale, chief economist at Realtor.com, says that while that forecast is “likely to overestimate mortgage rates for the year,” a 7.4% average rate “is still within the range of possibility.”

“The Fed has made it clear that we have seen some improvement with inflation, but there hasn’t been enough,” Hale says. “So we may not yet have seen the peak for mortgage rates. I think there still is that risk for rates to climb.”

Redfin: 6.1%

Redfin expects the 30-year fixed rate to decline throughout the year, ending the fourth quarter around 5.8%, according to the brokerage’s 2023 Housing Outlook. All said, the average homebuyer’s rate this year would be about 6.1%. Taylor Marr, deputy chief economist at Redfin, says that with the latest data on cooling inflation and a tempering job market, rates are now on a more downward trajectory than originally forecast and could be below 6% by the end of the first quarter.

“Typically when you look at the 10-year Treasury yield, the 30-year fixed mortgage rate is some spread higher than that, usually about 180 basis points,” Marr says. “Right now, that spread is still around 260 to 280, which makes it a full percentage point higher. … That spread is still wide. If you then look into the end of the year, we have a narrowing. That spread is going to normalize because there will be a little less volatility and uncertainty, at that point we will be going through a recession, but there will be less uncertainty with inflation.”

Why Mortgage Rates Are Expected to Drop This Year

Forecasters interviewed by U.S. News predict that mortgage rates will begin the year higher, falling by year-end. That’s due to the widespread belief that inflation has peaked as the Federal Reserve slows the pace of its benchmark rate hikes. And rate hikes aren’t the only tool the central bank has been leaning on to fight inflation — the Fed also began selling off mortgage-backed securities and Treasury bonds last year to reduce the size of its balance sheet, which put even more upward pressure on mortgage rates in 2022.

“Looking at history when there’s a rapid rise in rates, traditionally there’s a bit of a recovery, almost a regression to the mean,” says Redfin’s Marr, adding that sub-3% rates were “a bit of an anomaly.”

[Compare: Mortgage and Refinance Rates in Your Area.]

The 30-year fixed rate increased at a record pace last year, and while that alone doesn’t mean mortgage rates will fall in 2023, it’s met with economic signals that indicate a recoil. The Fed’s monetary policy this year (and in turn, the mortgage rate environment) will be greatly shaped by inflation data. If inflation continues to decline as expected, the central bank will be more careful with raising interest rates and selling Treasurys. But if inflation rears its ugly head, the Fed may again tighten its monetary policy, which could push mortgage rates higher.

“Every month, you’re going to see market movement before and after the inflation report,” says Orphe Divounguy, senior economist at Zillow. “Everybody’s looking at that to try to figure out where the Fed is going, and it’s really what’s causing the yield on Treasurys to move. It’s all going to depend on where the Fed thinks inflation is going next.”

Still, Divounguy says that inflation will come down for a couple of reasons: Wage growth is slowing, and demand is coming back into balance with supply. An early barometer of this is the rental market — asking rents have steadily declined since last February, which indicates inflation will likely continue slowing.

“Inflation has peaked, and inflation expectations are coming down. Long-term interest rates reflect the risk of future inflation uncertainty.” — Zillow Senior Economist Orphe Divounguy

One caveat, though: “Of course, there’s no telling if we get some sort of supply shock or climate disaster,” Divounguy adds.

Not all economists are as confident that inflation is softening, though. Hale, of Realtor.com, says it’s important not only to measure current inflation, but also how consumers feel about future inflation. Median one-year inflation expectations fell to 5% in the December Survey of Consumer Expectations, which is the lowest level since July 2021. With inflation running at a 6.5% annual pace, there’s a little bit of a disconnect between where we are and where we expect to be.

“I do think that the first half of the year, as the incoming data comes in, we’re going to see that inflation is a little bit stickier than forecasters are expecting,” Hale says. “As we see more progress on inflation, that can sometimes raise the expectations, so unless we see inflation improve with that same momentum, that raises the risk for a report that’s higher than expected. As the improvement happens, it’s not going to be quite as uniform as people would like to see.”

Conditions may improve once the Fed reaches its terminal rate — that is, once policymakers decide they’re done hiking rates. But given how sensitive mortgage rates are to economic data releases, forecasters say mortgage rates are likely to remain volatile until then.

Experts Weigh In: How Rates Will Impact the 2023 Housing Market

Affordability Will Remain a Top Concern for Buyers

“Even with a 6% mortgage rate, (first-time) buyers still earn $30,000 less than the income needed to purchase a starter home. As a result, less than 20% of the renters can afford to buy a starter home. Thus, homeownership rate may continue to fall in 2023 as the share of first-time homebuyers will likely shrink even further from the 2022’s all-time lows. Housing affordability is going to be the main driver of the housing market in 2023.” — Evangelou, NAR

“We are seeing more homes available for sale, which is helping, but they’re still listed for sale at higher prices than we saw a year ago. Combined with higher mortgage rates, it’s going to be a challenging market.” — Hale, Realtor.com

“Even with prices falling and rates falling and incomes growing at still faster rates, we still expect a hurt with affordability relative to 2019 or even 2021. Affordability overall is still not going to see that much of an improvement.” — Taylor Marr, Redfin

“Because affordability is really the issue in the market today, the more affordable markets will see relatively healthier levels of activity. People moving from really expensive markets to more affordable markets can see their mortgage payments stay the same, if not lower.” — Divounguy, Zillow

[Calculate: Use Our Free Mortgage Calculator to Estimate Your Monthly Payments.]

Inventory May Improve, but There’s Still a Housing Supply Shortage

“We still have this big-picture, long-term housing shortage where we’re just not building enough housing to keep up with the number of households we have in this country, and it’s not going away. We’re seeing a temporary pullback in demand that’s brought about some better balance, but if demand were to rebound to normal, which we expect as inflation is reined in and the market normalizes, you’re still going to have that tightness in supply. Yes, the market will be in better balance, but it’s largely because we’re going to have less demand and not really because we’ve addressed the fundamental supply issues that we have.” — Hale, Realtor.com

“We were undersupplied going into the pandemic, and that unexpected demand boom just made things a lot worse. The slowdown in building of late is certainly not going to help the supply issue. If we do see rates continue to fall, we’re still going to need that supply.” –Joel Kan, MBA

“We have a record number of homes under construction in the United States. In almost every neighborhood, there’s construction, there’s unfinished projects. Those are going to come on the market and help with that inventory. … Inventory is slowly creeping up but is still much lower than it was before the pandemic.” — Divounguy, Zillow

Current Homeowners Will Remain Reluctant to Sell

“You have a lot of existing homeowners who bought in the past two or three years who have lower mortgage rates than what’s out there now. That’s one sort of wild card to see if or when these people might sell and lose their lower mortgage rate. Who might be willing then to buy a home even at a 5% mortgage rate? You certainly have buyers who don’t have to forgo a lower rate, like first-time buyers and renters, and for them, the right kind of home and right mortgage rate might be manageable from an affordability standpoint.” — Kan, MBA

“As mortgage rates come down, we’re going to see a lot of potential sellers who had been locked into their really low rates. A decrease in mortgage rates will help to facilitate that a little bit because 70% of sellers end up buying again. If affordability is a problem for buyers, it’s also a problem for sellers.” — Orphe Divounguy, Zillow

“The tightest supply is at the lower price end of the market. Those buyers are looking for smaller houses and condos. The lower rates are holding up those move-up buyers who are looking at holding onto a townhome as an investment property. We’re anticipating that a lot of these homeowners will stay in place or they won’t sell their entry-level units.” — Kan, MBA

“Homes are going to sit on the market, and that’s going to make it look like there’s more homes for sale, but that’s not necessarily going to change the number of homes for sale that are available to buyers. What we will see is less competition from other shoppers.” — Hale, Realtor.com

Fall and Winter May Be a Good Time to Buy

“As a first-time homebuyer, if you’re only looking to buy, fall tends to be a better period of the year. You might not get your top pick of available options, but you’ll face less competition. The pricing is a little bit lower. I think that will still be the case this year, and buyers will have the benefit of potentially lower mortgage rates.” — Hale, Realtor.com

“The 30-year fixed mortgage rate will likely average 5.7% and 5.6% in the second and third quarters of the year, respectively. With a 6% mortgage rate, housing will become more affordable for many buyers.” — Nadia Evangelou, NAR

“While there’s still a lot of work to do at the Fed, there’s a light at the end of the tunnel. At the end of 2023, beginning of 2024, we’re going to see a much better housing market, a housing market that looks more normal than we’ve seen in a long time.” — Divounguy, Zillow

Advice for Those Buying a Home in 2023

“There’s a margin of error so you can never be 100% sure (where mortgage rates are going), and you can’t really control it. So if you’re a home shopper, you want to focus on the things you can control, like setting your budget, thinking about what you have to have in a home and what you can live without, so you know how to react with mortgage rates.” — Hale, Realtor.com

“It’s not timing the market, but time in the market. It’s not a good idea to try and time the market, so for housing, it’s all about finding that home you love, because you’re going to be in it for a long time. Even potential landlords, you wouldn’t want to buy a house that you wouldn’t see yourself living in.” — Orphe Divounguy, Zillow

“Forty-two percent of Redfin deals were able to get concessions, like seller-paid rate buydowns (in the fourth quarter of 2022). They’re able to get that because of the additional bargaining power. There are some buyers that if they play the market right, they can find that good deal.” — Marr, Redfin

[READ How to Get Your Credit Ready to Buy a Home.]

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2023 Mortgage Forecast: Rates Expected to Decline originally appeared on usnews.com

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