As the Federal Reserve continues its fight against inflation, where mortgage rates will end up next year is anyone’s best guess – literally.
Economists predict rates could be between 5.2% and 8% – potentially even higher than that – depending on a number of uncertain factors such as how quickly inflation subsides and how the economy absorbs rate hikes from the Federal Reserve next year.
The guessing game comes after mortgage rate forecasts for this year were horribly wrong, but what remains constant is that affordability issues will continue to plague buyers in the new year – unless there is a recession.
“Homebuyers buying a home in 2023 will need to get creative. They could do this by exploring more affordable but more remote neighborhoods in the suburbs, considering a new market entirely, or other types of financing options,” said Danielle Hale, chief economist at Realtor.com. “That doesn’t mean buying a home won’t be impossible, but it will be difficult for buyers in 2023.”
“Rates had never doubled in a year”
Mortgage rates rose at their fastest pace in more than 50 years in 2022, topping 7% earlier this month and far exceeding many housing analysts’ earlier forecast of hitting 4% by the end of the year.
“Rates have never doubled in a year before,” Freddie Mac analysts said in their October quarterly forecast.
The rapid ascent — spurred by the Federal Reserve’s aggressive campaign to rein in inflation — has hurt the once-slumped housing market. Housing affordability fell to its worst level in nearly 40 years, mortgage data and technology provider Black Knight found, as higher rates, high house prices and tight inventories continued to deteriorate the purchasing power of buyers.
Although the housing market has begun to cool, signaling a correction, Realtor.com’s forecast for 2023 indicates a return to normal is far from near, citing a “gradual adjustment” that could last until in 2025.
Where are the rates going
Hale and Realtor.com forecast that in 2023, rates will average 7.4%, followed by initial rate hikes in the first half and a slight pullback to 7.1% by the end of the year. year. However, the slight drop in rates will not be enough to allay homebuyers’ affordability concerns as incomes will remain out of step with high home prices and rates.
How rates move next year will largely depend on inflation and whether or not the United States enters a recession, Mark Fleming, chief economist at First American, told Yahoo Money.
“It all depends on interest rate changes from the Fed,” Fleming said. “The base case is something to the effect that the Fed continues to raise interest rates next year, perhaps in small increases that we’ve seen in recent increases…if that trajectory gets rid of inflation, we could probably see interest rates somewhere closer to 8% by summer.
If inflation remains rampant this summer, forcing more action from the Fed, mortgage rates could top 8% by fall, Fleming said.
Other housing economists predict rates will experience a soft landing. Freddie Mac estimates rates will average 6.4%, while Fannie Mae estimates rates will average 6.8%. Goldman Sachs is aiming even lower, with the average 30-year fixed rate dropping to 6.2%.
Housing affordability will remain a major concern through 2023.
Buyer demand is 41% lower than a year ago, according to the MBA’s latest demand survey, as rising rates and home prices continue to eat away at buyers’ budgets. At last week’s rate of 6.58% – a household earning the median income of $72,000 a year would spend up to 40.6% of their monthly salary to pay the monthly mortgage payment, according to figures provided by Realtor. com.
Add to that the rising prices of all basic commodities: gas, food and utilities.
In 2023, income is expected to rise 3.9%, according to Realtor.com, but it won’t be enough to offset home prices which are expected to rise 5.4%. This will increase the typical monthly mortgage payment to $2,430, 28% more than in 2022, costing potential buyers even more.
“If we fail to get inflation under control, affordability will get even worse,” Fleming said. “A correction in house prices will not be enough to mitigate the damage caused by a potential mortgage rate of more than 8%.”
The case of 5% mortgage rates
On the other hand, one economist argued that rates could fall next year, especially if the United States enters a recession.
“We expect a recession next year, so the weakness in the economy will be more visible in a weaker labor market,” Mike Fratantoni, chief economist and senior vice president of the MBA, told Yahoo Money. . “That’s bad news for people who are going to find themselves out of work, but for the economy as a whole, one of the impacts of this is that a slowdown is likely to help the Fed bring inflation down.”
According to Fratantoni, if the Fed stops raising short-term rates early next year due to a recession, longer-term rates like mortgage rates will tend to fall by the end of the year. ‘year.
“We think rates will drop to around 5.2% by the end of 2023,” he said.
Additionally, a period of recession will likely keep home prices relatively stable through 2024 and homes on the market longer, giving buyers room to negotiate deals or shop around.
“National house prices will likely be about flat and will remain so through 2024, so house prices won’t drift away from them like they have for the past couple of years,” Fratantoni said. “Another benefit for homebuyers is that homes will stay on the market longer, there will be fewer bidding wars, and it will be less frantic.”
That is, of course, if they manage to keep their jobs during a recession.
Gabriella is a personal finance reporter at Yahoo Money. Follow her on Twitter @__gabriellacruz.
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