The Federal Reserve’s decision to slow the pace of interest rate hikes this week pushed mortgage rates lower — and it happened in spite of the central bank reiterating that it would continue to tighten its grip on the economy next year. These lower rates are encouraging news for the industry, which saw rates climb past 7% in October, but whether that will be enough to prop up home sales is a question that has not yet been answered.
The average 30-year-fixed mortgage rate averaged 6.31% as of December 15, down two basis points compared to the previous week (6.33%), according to the latest Freddie Mac survey. At 3.12% one year ago, the same loan rates were about half of what they are today.
“Mortgage rates continued their downward trajectory this week, as softer inflation data and a modest shift in the Federal Reserve’s monetary policy reverberated through the economy,” Sam Khater, Freddie Mac’s chief economist, said in a statement.
In conjunction with the central bank raising the federal funds rate by 50 bps rate hike after its two-day Federal Open Market Committee, policymakers expect to lift borrowing costs to 5.1% by the end of 2023, an increase from its projection in September.
“The market’s reaction to Wednesday’s announcement from the Federal Reserve – in which members officially predicted a higher-than-previously-expected path forward for their benchmark interest rate – was less obvious,” Matthew Speakman, Zillow Home Loans senior economist, said.
The news took the wind out of the market’s sails initially, but assurances from Fed Chair Jerome Powell that the central bank would likely shift its outlook if more evidence emerges that inflation pressures are waning, helped to buoy investors’ spirits, sending bond yields – and the mortgage rates they tend to influence – back downward, Speakman explained.
“Altogether, mortgage rates remain at their lowest levels since the late summer as the year nears its end,” Speakman said.
The 10-year Treasury note, which dictates mortgage rate movements, dropped to 3.49% on Wednesday from 3.51% on Tuesday after the Bureau of Labor Statistics released the Consumer Price Index, which showed inflation slowed rapidly than economists’ expectations.
Homebuyers weigh their options
The Mortgage Bankers Association (MBA) expects the recent downward trend in mortgage rates to continue. Along with moderating home prices, declining rates should “encourage more homebuyers to return to the market in early 2023,” Bob Broeksmit, president and CEO of the MBA, said.
It was only last week that mortgage demand showed an uptick with rates trending downward after consumer prices showed slower-than-expected growth in October. The volume of overall mortgage applications rose 3.2% last week compared to the previous week, led by refinance and purchase.
“With more homes available for sale, and more of them sporting price cuts, some buyers are running the math and finding that the slide in rates is offering better options within their budgets,” said George Ratiu, manager of economic research at Realtor.com.
For real estate markets more broadly, continued moderation in inflation would diffuse the upward pressure that has led to this year’s surge in mortgage rates, Ratiu said.
“While a return to the 3.0% range is not likely in the near future, even a flattening of rates in the 5.5% – 6.0% range in 2023 would offer housing markets an improved foundation,” he said.
Realtor.com forecasts existing home sales to decline to 4.53 million units next year, down from the expected 5.28 million units in 2022. The National Association of Realtors projects home sales will slide by another 6.8% in 2023, dropping to 4.78 million.
The recent declines in rates leading to a stabilization in purchase demand is good news, but the bad news is that “demand remains very weak in the face of affordability hurdles that are still quite high,” Khater said.