Will Mortgage Rates Go Down in 2023?
Mortgage rates fell to an all-time low of 2.65% in 2021. Now theyâre more than double that, and everyone is asking the same question.
Will mortgage rates drop in 2023?
Letâs break it down.
Why are mortgage rates so high?
Mortgage rates are influenced by several factors, the foundation of which is the overall state of the economy. When the economy is doing well and moving fast, rates are typically higher. When the economy is sluggish, rates are usually lower. Seem backward? Hereâs why it works that way:
The Fed
Many people think that the Federal Reserve (also known as âthe Fedâ) sets mortgage rates, but thatâs not quite true. The Fed sets the federal funds target rate, which guides the amount that banks charge each other to borrow money and impacts the rates they charge consumers, too. Thatâs because it changes the amount banks must charge to cover their own costs.
Why does the Fed ever raise rates? Everyone likes a lower interest rateâright? The Federal Reserve has two jobs, called its âdual mandate,â as assigned by Congress. It must act to keep prices stable in the economy and to support maximum employment. One of the ways it does this is by moderating interest rates to support a stable financial system (OâConnell, 2023).
For exampleâŠ
When the economy is slowâlike it was during the initial COVID-19 crisisâthe Fed lowers its rates to increase cash flow and encourage consumer spending. But when the economy is doing well and moving fast, borrowing, consumer spending, and demand are all elevatedâwhich can cause inflation. A major problem with inflation is when prices rise at a rate with which salaries donât keep pace, people suddenly canât afford to buy things, and the economy grinds to a halt. For that reason, when the economy is moving too quickly and inflation is growing unsustainably, the Fed increases the federal funds rate to constrict cash flow.
The idea is that higher ratesâwhile uncomfortableâwill slow spending to a sustainable pace while preventing an economic crash down the road. Since the housing market, consumer spending, and inflation all hit peaks in late 2022, the Fed pumped the brakes with interest rate hikes in an effort to divert a full-blown recession.
Will mortgage rates drop in 2023?
Now that we know why rates are so high, we can make an educated guess about their future. Many experts suggest that 2023 will see a slowdown in the U.S. economy, and if thatâs true, mortgage rates will drop as well.
Will mortgage rates go down in 2023? Here are the detailed answers from top industry experts:
Mortgage Bankers Association
The Mortgage Bankers Association has stated that âlong-term rates have already peaked. We expect that 30-year mortgage rates will end 2023 at 5.20%.â As of this writing, the average APR for the benchmark 30-year fixed-rate mortgage is over 7%, so that prediction represents a significant drop by 2023âs end.
National Association of Realtors
The NAR Director of Forecasting, Nadia Evangelou, predicts that âmortgage rates likely will settle below 6% and experience less volatility this year.â She continued by saying that âAlthough rates remain more than double a year ago, they will likely stabilize as inflation will continue to slow down in the coming months.â
Goldman Sachs
Analysts at Goldman Sachs are less optimistic, predicting that mortgage rates will average 6.5% in 2023. Why this rate? The investment bank expects a âsignificant decline in U.S. inflation,â but also notes âthat the rapid decline in mortgage origination, especially refinances, has caused some lenders to exit or scale back lending. This has the potential to allow the remaining lenders to expand their margins by pushing mortgage rates higherâ (Lambert, 2023).
Freddie Mac
In its most recent forecast, Freddie Mac predicted that the 30-year fixed-rate mortgage will average 6.4% in 2023, with a lower average of 6.2% in the fourth quarter. The financial company cited the job market, moves from the Fed, and the decelerating housing market.
Morgan Stanley
In its U.S. housing market outlook forecast, Morgan Stanley predicts that 30-year fixed mortgage rates will average 6.2% in 2023. In a best-case scenario, the investment bank writes that mortgage rates could fall below 6%, but that would require the Fed to successfully tame inflation sooner than expected (Lambert, 2022).
Bankrate
Bankrateâs chief financial analyst, Greg McBride, CFA, forecasts mortgage rates to fall to 5.25% by the end of 2023. He explained that âwe should see a notable pullback in mortgage rates as inflation pressures ease and as the economy slowsâ (Ostroski, 2023).
Final thoughts
Financial and real estate industry experts agree that mortgage rates will fall in 2023. By how much? Thatâs still up for debate, with some experts forecasting a nearly 2% drop and others one of less than 1%.
No matter the number, lower mortgage rates represent relief for buyers struggling with affordability. If youâve been waiting to buy due to high home prices and high mortgage rates, 2023 is shaping up to be a good year for you.
But even as rates come down, theyâre not likely to hit 2021 levelsâso youâll want to do everything you can to reduce your rate on your own. That means working on your credit score, looking into a rate buydown, and shopping around to find the lender with the best terms for you.
Letâs buy your dream home in 2023
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