The average fixed rate on a 30-year mortgage is expected to fluctuate between 6% and 6.5% this spring, according to housing economists interviewed by U.S. News. Mortgage rates are likely to decline through 2023, although they will remain volatile as the markets react to economic data on inflation and employment.
Mortgage interest rates aren’t expected to dip below 6% until the second half of the year, when many analysts expect the U.S. economy to enter a recession. In the meantime, spring homebuyers may find it more difficult to qualify for a mortgage as lenders tighten their credit standards in the wake of two regional bank failures in March. Here’s what you need to know about borrowing a mortgage to buy a home this spring.
[Read: Best Mortgage Lenders.]
Mortgage Rate Predictions for Spring 2023
Most forecasters say that the average 30-year fixed mortgage rate will be at or slightly above 6% during the second quarter of 2023, which includes the spring months of April, May and June. That would be a welcome relief from current rates, which are closer to 7%, and it suggests that mortgage interest rates will start the spring higher before moderately falling.
That being said, waiting for rates to drop before buying a home may have unintended consequences. A modest decline in mortgage rates in February brought a wave of homebuyers back into the market, reigniting competition and causing home prices to tick up again.
“Buyers who are waiting for lower rates will likely have some company. And if they’re OK with competitive market conditions, that can be a fine approach,” says Danielle Hale, chief economist at Realtor.com. “If you think you’re going to get a lower rate and still get the same market conditions that buyers have now, I think that’s a misconception.”
Here’s what you should know about mortgage rate predictions for this spring, so you can make an informed homebuying decision.
Fannie Mae: 6% to 6.6%
Fannie Mae’s March Housing Forecast has mortgage rates increasing to 6.6% in the second and third quarters, retreating back to 6.4% by year-end. However, it’s important to note that this forecast was published in the short period of time between two important news events: Fed Chairman Jerome Powell’s hawkish congressional testimony on March 8 and the collapse of Silicon Valley Bank on March 10.
At the time when Fannie Mae’s most recent forecast was finalized, the belief was that the Fed would implement a 50-basis-point rate hike. It didn’t account for the high-profile bank failures yet to come, which led the Fed to hike rates at a more modest 25 basis points.
“I think if we redid the forecast now, it would be pretty close to what the February forecast looked like,” says Doug Duncan, senior vice president and chief economist at Fannie Mae.
Fannie Mae’s February forecast is more in line with the rest, with the 30-year fixed rate averaging 6% in the second quarter before declining to 5.7% by year-end. However, Duncan says that inflation may persist given the strong economic data released at the beginning of the year.
“The fact that the Fed went ahead and raised a quarter-point in spite of the bank issues tells me how significantly they still are concerned about inflation,” Duncan says. “In terms of core inflation, it still is very sticky.
“It’s still possible that there is some underlying strength in the economy and the Fed gets a soft landing, but one thing that has changed is that there’s an increased possibility of a hard landing given how difficult it is to trace all the tremors of a bank failure,” Duncan adds.
Mortgage Bankers Association: 6.1%
The Mortgage Bankers Association expects rates to average 6.4% in the first quarter before falling an entire point to 5.3% by year-end, according to its March Mortgage Finance Forecast. During the spring months, the MBA predicts the 30-year fixed rate to hover around 6.1% before dipping below 6% in late summer and fall.
“With volatility, it’s not a straight path from 6.4% to 5.3%,” says Joel Kan, MBA vice president and deputy chief economist. “It’s going to be pretty bumpy.”
There are a few reasons why the MBA expects mortgage rates to decline so drastically this year. For one, Kan says he still expects the U.S. economy to enter a recession later in the year — “and when there’s weakness, that puts downward pressure on rates.”
Another driver of the MBA’s forecast is the large spread between the 10-year Treasury bond and the 30-year fixed mortgage rate. While that spread is historically around 1.8 percentage points, it’s currently closer to three full points. Kan expects that gap to narrow over the next few years but says that it will remain wider than usual given volatility on the investor side.
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National Association of Realtors: Low 6% Range
Lawrence Yun, chief economist at the National Association of Realtors, similarly says that rates will stay around the low 6% range during the spring months, dipping more drastically in the second half of the year as the economy weakens. He expects that falling housing costs will drive down inflation, noting that “rents simply cannot continue rising given the massive apartment construction that is happening throughout the country.” And if inflation does begin to recede, the Fed will have reason to pause rate hikes, or even reverse course.
“Consumer price inflation is what the Federal Reserve is looking at, so they have been aggressively raising interest rates, but I think the interest rate hikes are pretty much done,” Yun says. “There may be one more for 25 basis points. There’s a belief that they may even cut rates by year-end.”
Like Kan, Yun also points to the abnormally large spread between the 10-year Treasury bond and the 30-year fixed mortgage rate, although he predicts that the gap will begin to shrink in a matter of several months rather than another few years. He says there’s a “natural incentive” for financial market investors to buy Federal Housing Administration mortgages that are “essentially government-guaranteed,” which would diminish the large spread and bring mortgage rates down.
“If the spread were to go back to normal, then automatically we are getting back to the 5.5% range for mortgage rates,” Yun adds.
Realtor.com: 6% to 7%
Hale reiterates her previous forecast that inflation remains stickier than originally thought, which may result in continued tightening from the Fed and, in turn, more stubbornly elevated mortgage rates.
“Our expectation at this point is that inflation is going to be a problem that’s not going to be solved overnight, but it does seem like mortgage rates have established some boundaries roughly between 6% and 7%,” Hale says. “I expect that they’ll fluctuate between that, depending on how good or bad the most recent economic data has looked.”
When it looks like the Fed is able to manage inflation while achieving a soft landing, mortgage rates could come down to the lower end of that range. But when inflation or employment data comes in hotter than expected, rates will trend higher. Overall, Hale expects that mortgage rates will remain volatile in the spring months “with maybe a more slightly upward bias” than otherwise forecast.
“If the Fed makes progress about like we’re expecting them to, we’ll get to the point when rates will start to decline, but that might not be till the end of the year,” Hale says.
Wells Fargo: 5.75% to 6.2%
In a March Housing Outlook, Wells Fargo economists forecast that the average 30-year fixed mortgage rate will begin the second quarter around 6.2%, dipping as low as 5.75% by the end of June. “Even if higher in the near term, we currently expect mortgage rates to trend lower over the course of this year and next,” the report reads.
[Compare: Mortgage and Refinance Rates in Your Area.]
Experts Weigh In: What Rates Mean for Spring Homebuying Season
Mortgage Rate Volatility Will Make Planning Difficult
“I still think interest rates are going to trend down because I think inflation is going to trend down, but over the course of the spring it’s going to be a lot of volatility.” — Daryl Fairweather, chief economist at Redfin
“The important thing for shoppers to consider is that mortgage rates are hard to predict, and you can’t really control them. It makes them hard to plan around.” — Hale, Realtor.com
“Rates are difficult to predict, especially now that you have this new lending facility at the Fed to address bank stress. It just complicates things, so you’re seeing a lot of volatility in mortgage rates.” — Orphe Divounguy, chief economist at Zillow
Competition Will Persist, but There’s Room for Negotiation
“It’s not going to be anywhere near as competitive as it was last year, when people were lining up with multiple offers, and that’s not going to be happening at all. There’s still going to be competition for well-priced homes that are below a metro’s average home price, but luxury homes are going to be the weakest market.” — Fairweather, Redfin
“What we are seeing is not only a better balance between buyers and sellers, but also for buyers to negotiate. The good thing is that they now have more power than they’ve certainly have had in the past 36 months.” — Bill Banfield, executive vice president of capital markets at Rocket Mortgage
“It’s still the case that, even though builders have slowed activity, we still have a shortage of supply relative to the demand. … There is a pent-up demand that gets activity at higher interest rate levels than you would think. Part of that, we believe, is that there’s the knowledge that you can refinance that mortgage within a year or two.” — Duncan, Fannie Mae
New Construction Will Provide a Buffer for Low Inventory
“I think it’s a great time to buy new construction. The biggest difference is that these existing homeowners were able to lock in 3% mortgage rates. With a builder, there’s no mortgage rate lock in effect, and they will do what it takes to offload their homes. It is more expensive, but they have been offering to buy down the mortgage rate. These builders just want to do what’s necessary to keep the deal.” — Fairweather, Redfin
“Builders in today’s market are pretty motivated. They don’t have those rate lock considerations that existing homeowners have, and we continue to see that existing homeowners are not becoming sellers at the rate that they have over the past few years. On balance, builders are a little bit more friendly to buyers than existing home sellers right now.” — Hale, Realtor.com
“We’re starting to focus on the new construction side, even though it’s only about 10% of the for-sale inventory, it helps to free up existing-home inventory. It produces a ripple effect … a housing ladder move-up effect where (existing homeowners) vacate a current home to move into a new home. There is also something to be said of the fact that builders are catching up on the under-construction backlog, so now they actually have inventory to sell. That’s another piece in the puzzle that’s really going to help the housing market.” — Kan, MBA
Tight Credit Conditions May Make It Harder to Qualify for a Mortgage
“It’s possible that rates don’t change but the underwriting criteria to determine if you qualify for that rate might tighten. So the market rate’s 6.2%, but we’re not going to take anyone with (a loan-to-value ratio) over a certain level, and that level might be lower than it was previously.” — Duncan, Fannie Mae
“It could be harder to qualify for the different kinds of mortgages out there, whether it’s Fannie, Freddie or FHA. And especially on the jumbo side, that is not a (government-backed) loan, so these loans are a little less desirable for banks given their need for liquidity.” — Kan, MBA
“You also have that heightened uncertainty. Fear alone causes people to sit on their wallets. You don’t go out and buy a new house if you’re worried that something’s going to happen in the near future, that you’re going to lose your job.” — Divounguy, Zillow
Tips for Spring 2023 Homebuyers
“Try to save up as much as you can for a down payment. You can get into the housing market with certain programs with as little as 0% down. … But generally speaking, the more you have saved for a down payment the less you have to borrow, which reduces your reliance on mortgage rates.” — Hale, Realtor.com
“Lock in a rate you feel comfortable with so you don’t have that volatility risk. Just focusing on the rate you can afford is a good idea. If you want to feel better about it, you can refinance later on. I still expect rates to fall in the next year or two.” — Fairweather, Redfin
“People are using temporary buydowns because it provides them relief for the first few years. And some people say, ‘I want to pay one or two points at closing because I want payment relief over the life of the loan.’ If you want to be in the home long term and you want to take a bet that you’ll take a low rate for the entire life of the loan, then buying points is a good option.” — Banfield, Rocket Mortgage
“There’s a combination of different ways to bring the rate down, whether it’s a buyer who might be choosing an (adjustable-rate mortgage) or sellers offering concessions to buy down the rate. Temporary rate reductions get the buyer in and are able to get a lower rate at least for a year or two.” — Kan, MBA
[READ How to Get Your Credit Ready to Buy a Home.]
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Spring Mortgage Forecast: Rates Will Stay Above 6% originally appeared on usnews.com
