(2023) Mortgage Forecast: Rates Expected to Decline

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(2023) Mortgage Forecast: Rates Expected to Decline

Mortgage rates are widely expected to fall this year as inflation recedes and the U.S. economy prepares for the possibility of a modest recession, according to some of the nation's leading real estate economists. This comes after mortgage rates saw record-breaking annual gains in 2022.

Relatively lower mortgage rates could bring homebuyers who were priced out last year back to the table, but forecasters say that housing affordability will remain a top concern. Although higher borrowing costs have weakened homebuying demand, home prices are propped up by a longstanding supply shortage. And even with inventory expected to improve in the coming months, housing supply still sits well below pre-pandemic levels.

Here's where mortgage rates are headed in 2023 and how that will impact the housing market as a whole.

Mortgage Rate Predictions for 2023
Fannie Mae: 6.3%
The latest monthly Housing Forecast from Fannie Mae has the average 30-year fixed rate declining from 6.5% in the first quarter of 2023 to a flat 6% by the end of the year.

"We expect housing to continue to slow, even though mortgage rates have come down recently," Doug Duncan, Fannie Mae's senior vice president and chief economist, says in a Dec. 19 statement. "Home purchases remain unaffordable for many due to the rapid rise in rates over the last year and the fact that house prices, though certainly slowing and in some places declining, remain elevated compared to pre-pandemic levels."

Freddie Mac: 6.4%
Freddie Mac's most recent Quarterly Forecast, released in October 2022, is pretty much in line with Fannie Mae's predictions. The mortgage giant puts the 30-year mortgage rate between 6.6% and 6.2% throughout 2023, with an average annualized rate of 6.4%.

"Mortgage rates generally follow 10-year Treasury yields, which would indicate that rates should be flat given the path of Treasurys. However, in recent months the spread between the primary mortgage rate and 10-year Treasurys has widened as the mortgage industry adjusted to dramatically lower transaction activity and recent interest rate volatility," the forecast said. "If spreads gradually return closer to historical averages, then mortgage rates will decline modestly over the next year."

Mortgage Bankers Association: 5.7%
MBA's December 2022 Mortgage Finance Forecast puts the 30-year fixed mortgage rate at 6.2% in the first quarter of 2023, gradually falling to 5.2% by year-end. Joel Kan, MBA's vice president and deputy chief economist, estimates that rates will average 5.7% throughout the year.

"You might have some weeks or some months where things might buck the trend," Kan says. "You might see a month or two where rates may come up because something happens in the market. The baseline is one thing, but there's always some room for surprises."

National Association of Realtors: 5.7%
Nadia Evangelou, NAR senior economist and director of forecasting, says that the 30-year fixed mortgage rate will likely average 5.7% this year, stabilizing below the 6% threshold in the spring and summer months.

"It seems that mortgage rates may have peaked," Evangelou says. "After surpassing the 7% threshold ... rates are finally moving down as inflation is cooling. In fact, two of the main factors affecting today's mortgage market have turned recently more favorably for mortgage rates. Inflation continues to ease while the Federal Reserve has switched to smaller interest rate hikes."

Realtor.com: 7.4%
Realtor.com's Housing Forecast for 2023 has the highest mortgage rate predictions, with the average 30-year fixed rate hovering above 7% throughout the year. Danielle Hale, chief economist at Realtor.com, says that while that forecast is "likely to overestimate mortgage rates for the year," a 7.4% average rate "is still within the range of possibility."

"The Fed has made it clear that we have seen some improvement with inflation, but there hasn't been enough," Hale says. "So we may not yet have seen the peak for mortgage rates. I think there still is that risk for rates to climb."

Redfin: 6.1%
Redfin expects the 30-year fixed rate to decline throughout the year, ending the fourth quarter around 5.8%, according to the brokerage's 2023 Housing Outlook. All said, the average homebuyer's rate this year would be about 6.1%. Taylor Marr, deputy chief economist at Redfin, says that with the latest data on cooling inflation and a tempering job market, rates are now on a more downward trajectory than originally forecast and could be below 6% by the end of the first quarter.

"Typically when you look at the 10-year Treasury yield, the 30-year fixed mortgage rate is some spread higher than that, usually about 180 basis points," Marr says. "Right now, that spread is still around 260 to 280, which makes it a full percentage point higher. ... That spread is still wide. If you then look into the end of the year, we have a narrowing. That spread is going to normalize because there will be a little less volatility and uncertainty, at that point we will be going through a recession, but there will be less uncertainty with inflation."

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