2022 was an interesting and, at times, chaotic year for the mortgage rate and homebuyers across the country. After an initial sharp rise to the first half of 2022, the average 30-year fixed mortgage rate peaked at 7.26% on October 25th and then declined to 6.37% by year-end (December 20). The initial weeks of 2023 saw further fluctuations, leading many prospective homebuyers and market hawks to wonder, “When will interest rates go down?”
Truth be told, the answer to this question is somewhat complex. Let’s take a closer look at some mortgage rate predictions for 2023 and explore what the big players in the industry have to say about the topic.
Key Takeaways and Trends
Due to a combination of factors, ranging from federal policies to housing availability, the mortgage rates for 30-year fixed-rate mortgages should decline by a significant percentage throughout 2023. Some forecasters believe rates may decline to below 6% by the end of the year, although there’s some room for other interpretations of available data.
Current Mortgage Rates
At the time of this writing, mortgage rates hover around 6.73%. This isn’t as high as the peak seen in 2022, but it still prevents many prospective homeowners from being able to afford property.
How Did Mortgage Rates Trend in 2022?
2022 was a landmark year in more ways than one, including interest rate activity. Mortgage rates at the beginning of 2022 were around 3.22%, but they eventually capped out at over 7% by the 4th quarter. Since that time, mortgage rates have decreased slightly, leading many forecasters to believe that further declines are on the horizon.
Expert Mortgage Rate Predictions for 2023
So, how will this affect mortgage rates for 2023, and when will rates go down? Right now, mortgage rates are between 6.5% and 7%.
The big players in the mortgage rate industry, such as Fannie Mae and Freddie Mac, have their own predictions. Let’s take a closer look at whether they think there will be lower rates or benchmarks for loans.
Doug Duncan, the senior vice president and chief economist of Fannie Mae, said that the firm expects housing to slow down and mortgage rates to decrease accordingly. This is partially driven by the fact that purchasing a home is still impossible for many Americans because of the meteoric rise in interest rates over the last few years.
Freddie Mac: 6.4%
Freddie Mac has similar predictions to Fannie Mae. According to its recent Quarterly Forecast, this mortgage firm believes that the average annualized rate will be about 6.4% and decline to 6.2% at the end of 2023.
Again, this indicates a gradual yet steady decline in the interest rates for 30-year fixed-rate mortgages.
Mortgage Bankers Association: 6.2%
The Mortgage Bankers Association or MBA announced in its recent Mortgage Finance Forecast that it believes the 30-year fixed-rate mortgage will be 6.2% by the end of the second quarter of 2023. Interestingly, it expects that the mortgage rates will go to 5.8% on average by the end of the year, which is much lower than the above predictions by Fannie Mae and Freddie Mac.
The MBA believes that there may be some months where the trend is bucked or reverses, resulting in an increase in mortgage rates temporarily before they decline once more. Time will tell whether the MBA is correct.
Evangelou specifically believes that mortgage rates have peaked after reaching over 7% in 2022. As inflation cools down and people have more money, mortgage lenders may decrease interest rates in order to attract more prospective homebuyers.
Realtor.com expects interest rates to be measuring in at 6.4% overall. This is according to Danielle Hale, the chief economist for Reatlor.com. She predicts that interest rates can potentially fall closer to 6.1% by the end of 2023.
Hale believes this due to the drop in rates that occurred in 2022 that trickled into 2023. Additionally, inflation is expected to continue to cooldown along with home price growth, which will allow mortgage rates to trend downward as well and hover in the low 6s by year-end.
Lastly, Redfin expects the average rate for 30-year fixed mortgages to decline and 2023 to end with rates hovering around 5.8%. The rate throughout the year should be about 6.1% on average.
According to Redfin’s 2023 Housing Outlook, cooling inflation, a stabilizing job market, and other factors will help push mortgage rates in a downward direction. They also base this prediction on the ten-year Treasury yield, which is normalizing due to reduced volatility and uncertainty in the wider market.
Are Mortgage Rates Expected To Fall in 2023?
Given all these predictions, one thing is clear: most believe that mortgage rates will drop sometime in 2023. Why and when will this occur?
It’s most likely that mortgage rates for home loans will decline gradually over the next year, reaching their lowest rates sometime in the fall or winter when homebuying is at its lowest. Most forecasts have rates sitting below 6.5% by year-end.
Why? Simply put, it’s because many people believe that inflation has peaked. The Federal Reserve has slowed down the pace of its interest rate hikes. The Fed sets the interest rate for the money that big firms like Fannie Mae and Freddie Mac borrow, which in turn impacts the rates that they set for home loans sold through them or their subsidiaries.
Furthermore, the Fed has begun to sell off various treasury bonds and mortgage-backed securities. This is with the goal of reducing the size of the Federal balance sheet, which previously put a lot of pressure on mortgage rates throughout 2022.
Put even more simply, a combination of record interest rates last year, declining inflation this year, and Federal Reserve policies should conspire to force rates down sooner or later.
When Will Mortgage Rates Drop This Year?
Given the above information, we can make some reasonable predictions about the activity of average mortgage rates across the country.
Short Term Predictions for Q1 and Q2
For the first half of 2023, interest rates will gradually decline. We could see interest rates go below 6.5% by June or so of 2023, although this will depend on buyer activity over some of the busiest real estate months of the year.
Generally, people buy more houses in the late spring and summer, when the weather is excellent, and when families try to move before a new school year starts. If there’s a lot of buyer activity, interest rates may increase or stabilize. However, if buyers are still hesitant and interest rates stay high, this could demotivate sellers and impact Spring and Summer sales activity.
Long-Term Predictions for Q3 and Q4
That all said, declining interest rates don’t necessarily mean that owning a home will become more accessible for the average American.
Indeed, many forecasters believe that, even with a 6% mortgage rate, first-time buyers will still not have enough money to purchase a starter home. Because of this, many will remain renters, which could open up more house-buying opportunities for foreign investors or those who wish to turn single-family homes into rental properties.
Homeownership rates, as a result, could continue to fall throughout 2023, even compared to the all-time lows seen in 2022. Many believe that housing affordability will be the primary driver of housing market activity throughout the next year.
However, more homes will be available this year than there were last year. This could help to drive overall home prices down, even if interest rates remain too high for the average first-time homebuyer. As down payment costs decrease, new loan opportunities or programs may inspire homeowners to take the plunge and purchase starter properties.
Don't forget that there is still technically a housing supply shortage. Many manufacturers, even after catching up with orders that were delayed throughout the COVID-19 pandemic, aren't building enough housing to keep up with the number of households currently in the United States. There is a temporary pullback in demand, but that's because of the above-mentioned rising prices and the affordability of the overall market.
What Happens if the U.S. Hits a Debt Ceiling?
Because mortgage rates generally track the broader economy, if the U.S. hits a debt ceiling, it could have negative impacts across the board. Without getting too complicated, if worldwide trust in the U.S. debt system fails, demand for U.S. treasury bonds could decrease. That, in turn, could lead to higher interest rates and higher mortgage rates for anyone, individuals and organizations alike, looking to borrow money for property.
Four Factors That Influence Mortgage Rates
Mortgage rates — usually referring to the average interest rates for 30-year fixed-rate mortgages (the most common mortgage loans for American homeowners) –— are affected by many important factors.
1. Economic Indicators
If the economy does well, generally, the U.S. mortgage interest rates increase: Buyers have more spending power, and there’s usually more demand for homes. This allows home sellers and real estate organizations to increase interest rates and make more of a profit. The reverse is true if the economy does poorly or enters a slump.
2. Inflation Expectations
Inflation, of course, also has an outsized impact on mortgage rates. When inflation skyrockets, mortgage rates rise because treasury yields become less valuable.
Investors want higher rates to compensate for the reduced purchasing power of the currency. Since the high inflation has been decreasing in recent months, this could be a sign that mortgage rates should also decrease.
3. Central Bank Policies
Naturally, the Fed or Federal Reserve and its policies impact mortgage rates across the country. That’s because big mortgagors and lenders get their money from the Fed via treasury bonds and other instruments.
The Fed recently announced a rate increase by about a quarter of a percentage point, going from 4.5% to 4.7%. This will slow down the borrowing rate and affect interest rates.
4. Political and Geopolitical Events
You can’t forget broader worldwide events, which can affect housing availability. If investors are scared about geopolitical stability, they may increase interest rates to compensate for lost income elsewhere and vice versa if political events are relatively stable.
How Do Mortgage Rates Impact the Housing Market?
Mortgage rates impact the broader housing market in two key ways.
When interest rates are higher, fewer Americans can afford homes. After all, being able to afford a down payment is just the start of buying a house. Prospective homeowners also need to know they’ll be able to make regular monthly payments for 30 years or so. Higher interest rates mean higher monthly payments and reduced buyer interest.
Willingness To Sell
Interest rates also affect homeowners’ willingness to sell. When mortgage rates are high, home sellers may not want to sell since they’ll have to purchase a property with high interest rates. In the long run, they could end up losing money from their home sales.
The reverse may make homeowners more willing to sell. Low interest rates give current homeowners the opportunity to sell properties they no longer want and purchase better properties for excellent prices and low fixed interest rates for 30 years or more.
How Can You Find Competitive Mortgage Rates?
Given the importance of mortgage rates for 2023 and beyond, you need to know how you can find competitive ones if you’re looking to buy a home, whether it’s your first home or not.
Vaster Can Help
Fortunately, Vaster can help you through the process from start to finish. We offer a comprehensive, supportive one-stop shop mortgage experience, enabling borrowers like you to find the best mortgage options based on your budget, credit score, and other factors.
More importantly, you’ll be paired with a knowledgeable loan officer to provide you with expert guidance one on one. When you work with Vaster, you’ll get the peace of mind and financial know-how you need to guarantee a good purchase and loan.
Ultimately, these predictions are never set in stone, and different economic activities or geopolitical developments could impact how mortgage rates fluctuate throughout 2023. It's also important to note that rates can vary from borrower to borrower and from loan product to loan product. Still, you can use these predictions as guides or reference points as you work with your realtor and lender to prepare for homeownership.
Want more insights and expert guidance? Reach out to Vaster and get started on your mortgage application with the personal finance experts who help work with you to find the right policy, including refinancing, that fits your needs.
Vaster is an equal opportunity lender. The rates and terms mentioned in this article are not a commitment to lend. NMLS 180495.