Experts Believe Mortgage Rates Are Heading Modestly Lower

The following article by ERA Key President and COO Cheryl Eidinger-Taylor was published recently in Banker & Tradesman.

Thirty-year fixed mortgage rates have risen more than 260% since the year 2020, when the year ended with an average rate of 2.67%, according to Freddie Mac.

Today’s average mortgage rate is 6.96%, which may seem high compared with the historically low rate of 2020, but it’s still below the historical average of 7.74% from 1971 to the present. And those who need a mortgage can be thankful that today’s rates are far below the 18.53% average rate reached in October 1981, when rates were raised to lower inflation that was even higher than we’ve recently experienced.

But what can we expect moving forward? Will rates continue to rise? Or will they drop back to a lower level?

Many experts believe mortgage rates will fall moderately in the coming months. For example, Freddie Mac chief economist Sam Khater said that, with inflation decelerating, rates should “gently decline” over the remainder of 2023. Others predicted rates could drop to 5.5% to 6.6% by year’s end:

• Fannie Mae’s July Housing Forecast predicts that the 30-year fixed mortgage rate will drop to 6.6% by the end of 2023 and 5.9% by the end of 2024.
• The National Association of Realtors expects that the 30-year fixed rate will fall to 6.0% by year’s end and 5.6% in 2024.
• Bank of America Global Research predicts that rates will drop to 5.25% by the end of the year.
• Michael Fratantoni, chief economist at the Mortgage Bankers Association forecasts that rates will be close to 5.5% by the end of 2023 and that they will “drop a little lower next year.”

For someone with a $500,000 mortgage, a decrease from 6.96% to 5.25% would represent a drop in monthly mortgage payments of $552. Such a drop could not only make housing affordable to more people, it would also enable potential homebuyers to buy more expensive homes.

It could also boost housing sales, which have fallen as rates rose. Many homeowners who want to move are reluctant to sell their existing home, which may have a low mortgage rate, because they would have to assume a higher rate on their new home. With higher rates, sales of existing homes fell 18.9% in June from a year earlier.

Mortgage Rates and Housing Prices

Housing prices typically rise when mortgage rates fall – and fall when rates rise. But the modest rate decrease that’s predicted may have little impact on prices, which have remained high even as mortgage rates have risen.

The national median housing price fell 0.9% in June from a year earlier to $410,200, but even that small drop is little consolation to anyone buying a home in Massachusetts, where the median sale price for a single-family home rose slightly from $615,000 a year ago to $616,450 in May 2023, according to the Massachusetts Association of Realtors.

Prices remain high because supply is not keeping up with demand. Millenniums, who are now buying homes for the first time, are pushing up demand for homes, even as mortgage rates have been increasing. This generation of 72.4 million, many of whom are becoming first-time home buyers, outnumbers baby boomers.

And while demand for housing is high, supply is not keeping up. The number of new listings fell 26% in June from a year earlier, according to Realtor.com.

Inventory is low, not only because homeowners are reluctant to exchange their low-rate mortgage for a higher-rate mortgage, but because it’s become increasingly difficult to build new homes. The pandemic drove the price of both lumber and labor higher, outpacing general inflation. Restrictive zoning and unavailability of buildable land have also contributed to a lack of inventory.

What Determines Mortgage Rates

Most of today’s home buyers have never seen mortgage rates anywhere near the historical average. Rates began dropping significantly in 2008, when the Federal Reserve Board began lowering rates to boost economic growth in reaction to the financial crisis. The Fed’s monetary policy kept the federal funds interest rate near zero for more than a decade.

The Federal Reserve doesn't set mortgage rates, but rates are affected by the Fed’s actions. Factors such as economic growth, inflation and unemployment also affect rates, as does competition among lenders. Mortgage rates dropped below 5% in April 2009, bumped back up to 5% in February 2011 and again in November 2018, but otherwise remained below 5% until April 2022.

Whether interest rates drop, as predicted, or increase depends largely on what happens to the rate of inflation. In an effort to tamp down inflation by slowing economic activity, the Fed in October 2022 began gradually raising rates from near-zero, pushing its current benchmark rate to between 5.25% and 5.5%.

If inflation continues to drop toward the Fed’s target rate of 2%, the Fed is expected to reverse course or, at the least, keep rates where they are. That would be good news for home buyers and sellers, and for the real estate industry.

Cheryl Eidinger-Taylor is the President and Chief Operating Officer of ERA Key Realty Services, which is based in Northbridge, Mass. She can be reached at CherylTaylor@erakey.net.