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Mortgage Interest Rate Forecast for 2023: When Will Rates Go Down?

by: Daria Uhlig



After more than two years of steady declines, rates for 30-year fixed-rate mortgage loans reached a record low of 2.7% at the end of 2020, according to data from Freddie Mac. By the week ending Nov. 10, 2022, rates had climbed to 7.08%, topping 7% for the first time since 2002. Rates have trended downward in the months since then, reaching 6.28% during the week ending April 6. It remains to be seen whether this trend will continue or economic forces will conspire to drive rates up again in 2023.


How High Will Mortgage Rates Go in 2023?

While rates could climb slightly higher over the next month or so, experts predict a modest decline after that. Freddie Mac, for example, forecasts a 6.2% rate in the fourth quarter and an annualized rate of 6.4% for the year without stating a specific peak rate.

Inflation

Inflation hit 40-year highs in 2022. Although it’s slowing, with the March consumer price index coming in at 5%, its smallest 12-month increase since the period ending in May 2021, it’s still significant. Shelter was one of the categories driving rising prices, according to the Bureau of Labor Statistics.


“While inflation doesn’t directly affect mortgage rates, it can indirectly cause mortgage rates to increase,” Amy Shunick, corporate financial controller at Bennett, told Rocket Mortgage. “Inflation is the devaluation of the dollar, which means that the purchasing power of your dollar decreases significantly as inflation increases. As inflation increases, so does the price of everything, including mortgage rates.”

Federal Funds Rate

The federal funds rate is the interest rate banks use to loan each other money. When the federal funds rate increases, banks pay more to borrow, and they pass along some of those costs to consumers by raising mortgage rates.

The Federal Reserve uses federal funds rate increases to tame inflation by discouraging consumers from spending and borrowing, which slows the economy and brings down prices. The rate increased seven times in 2022. That resulted in a total increase of 425 basis points, or 4.25%, between March 17, when the rate stood at 0.25% to 0.50%, and Dec. 15, when it stood at 4.25% to 4.50%. The funds rate increased by another 25 basis points, to 4.50% to 4.75%, in February of this year. Accompanying a March 23 announcement of an additional 0.25% hike, the Fed noted that its target range is 4.75% to 5%.

While these ongoing federal funds rate hikes could keep mortgage rates where they are now in the short term, they set the stage for lower rates in the long term by reducing inflation.


Are Mortgage Rates Expected To Drop Soon?

Mortgage rates could see a meaningful drop beginning as soon as this summer.

If the Fed is successful in reducing inflation to a level closer to its 2% goal by midyear, rates could begin to fall in the second half of 2023. A recession, which many experts think is likely this year, could also prompt the Fed to reduce the federal funds rate — in this case, to rev up the economy by encouraging consumers to spend and borrow.

Despite the Fed’s announcement of a 4.75% to 5% rate target, which it met with the most recent hike, Goldman Sachs expects an additional rate hike in May. However, it has rescinded its prediction for a June increase. What’s more, the investment bank said in a research note reported by Reuters that chances are good for a rate reduction in July.

The National Association of Realtors also believes rates could drop. Nadia Evangelou, NAR’s senior economist and director of real estate research, said in a March 2 blog post that “if inflation eases faster than expectations, mortgage rates could decrease to the low range of 6%.” Lawrence Yun, NAR’s chief economist, echoed that prediction in an April 6 blog post and said rates could even drop below 6%.


In its forecast commentary released in December 2022, the Mortgage Bankers Association predicted that the U.S. would be in a recession in the first half of 2023. While it expects the Fed to continue increasing rates to tame inflation, it believes that long-term rates have already peaked. “We expect that 30-year mortgage rates will end 2023 at 5.2%,” the organization noted in its forecast commentary. It reiterated the fourth-quarter 5.2% rate prediction in a Jan. 19 forecast.


Is This a Good Time To Lock In a Mortgage Rate?

Mortgage rates have trended downward over the last few months, but they haven’t moved in a straight line. That makes for a tough decision considering that lock-in periods can last 90 days. On the one hand, locking in now protects you from rate increases. On the other, you could pay more than you need to in the event that mortgage rates go down before you close on your loan.

Remember that the interest rate isn’t the only thing that impacts the cost of buying a home. Lower rates mean you pay less interest, but they also drive up demand for homes, which increases home prices. A sound strategy for many buyers, especially the more budget-conscious, is to lock in only after you’ve had an offer accepted on a home. That way, you make a purchase decision based on the big picture in terms of affordability and simply set it in stone by locking the rate.


Should I Refinance My Mortgage?

Whether it makes sense to refinance now depends on your circumstances. Freddie Mac recommends considering refinancing if it will result in one of the following:

  • Reducing your interest rate

  • Shortening the term of your loan

  • Locking in an adjustable-rate loan that’s about to adjust upward

Consider potential consequences of refinancing before you make the move. For example, refinancing into a loan with a lower rate can actually cost you money if you trade a loan you’ve been paying down for years for a new 30-year mortgage. A shorter-term loan generally has lower rates than a 30-year loan, but the higher principal payments could divert money from other financial priorities, such as paying down high-interest debt.

With any type of refinance, lender fees and closing costs chip away at any savings you stand to gain — even if the loan is advertised as having no fees or closing costs.

Lenders have two ways to offer no-fee/no-closing-cost loans. “One way is by charging you a higher interest rate to cover the cost of making the loan. The other way is by adding the closing costs to your loan amount,” according to the Consumer Financial Protection Bureau. “Both methods involve no cash to close the loan but result in a higher monthly payment.”


How Do Mortgage Rates Affect Home Prices?

Record home prices in the last couple of years were the result of several factors, including record-low mortgage rates, a limited supply of homes for sale, an increase in first-time buyers and migration from expensive cities to areas where homes were already in short supply, according to Freddie Mac. What these factors have in common is their effect on demand for homes.

Higher rates make it harder for consumers to buy, so demand drops — and as demand drops, so do home prices. Low rates like consumers saw in 2020 and 2021 make it easier for buyers to purchase, which increases demand and drives prices up.

As the spring homebuying season begins, prices again will be influenced by both rates and inventory. “With lower rates, more homebuyers will steadily appear,” Yun said. “That is why it is critical to ensure more housing supply to help meet the recovering demand.”


Final Thoughts

A volatile economy might tempt you to make decisions based on how long you expect a rate to last — or what you anticipate the next move to be. Resist the urge. Trying to time the market is rarely a good strategy, whether you’re investing in a home or in the stock market. Instead, set a budget based on what you can afford when you’re ready to buy. Or, in the case of a refinance, run the numbers through a refinance calculator to get an accurate picture of costs vs. savings, and base your decision on that. In either case, you’ll eliminate the uncertainty around the already-stressful process of buying or refinancing a home.


Information is accurate as of April 13, 2023.

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