Mortgage rates had previously been forecast to fall in 2023, but they’ve stayed higher for longer than expected in response to continued resilience in the U.S. economy, according to some of the nation’s leading real estate economists. As of early November, mortgage rates are nearly 8%.
As a baseline scenario, the 30-year fixed mortgage rate is expected to stay above 7% through the remainder of 2023, and it will likely remain above 6% throughout 2024. That’s due in part to the Federal Reserve’s hawkish monetary policy, with Fed officials reiterating their stance of keeping rates higher for longer in order to bring inflation back to the central bank’s 2% annual target.
“The reason mortgage interest rates continue to increase is mainly due to the jobs market”
says Jason Obradovich, CIO of the mortgage lender New American Funding, in an Oct. 19 statement. “A while back, the Federal Reserve had predicted that this tightening campaign would push the unemployment rate above 4.1% already. Yet here we stand with an unemployment rate that has barely moved, currently sitting at 3.8%, which was the same as the month prior.”
Here’s where mortgage rates are headed for the rest of the year and how that will impact the housing market as a whole.
At the start of 2023, economists predicted that mortgage rates would gradually decline throughout the year, but that forecast hasn’t come true. In fact, rates trended higher during the first three quarters 2023, reaching a new peak of 7.79% in late October, according to Freddie Mac.
Industry groups have revised their forecasts upward over the past several months, accounting for developments in the U.S. economy that are keeping mortgage rates elevated. For example, Wells Fargo predicted rates would average 6.09% this year in its January outlook but amended its 2023 forecast to 6.94% in October – an upward revision of nearly a point. Here’s where those mortgage rate predictions currently stand for the remainder of the year.
Fannie Mae: 7.3%
The October Housing Forecast from Fannie Mae puts the average 30-year fixed rate at 7.3% during the fourth quarter of 2023. The mortgage giant doesn’t expect rates to dip below 7% until the third quarter of 2024. All told, Fannie Mae predicts mortgage rates will actually be higher next year, averaging 6.8% in 2023 and 6.9% in 2024.
“We expect the higher mortgage rate environment to continue to dampen housing activity and further complicate housing affordability into 2024,” says Doug Duncan, Fannie Mae’s senior vice president and chief economist, in an Oct. 16 statement.
National Association of Realtors: 7.8%
NAR expects mortgage rates to rise to 7.8% in the fourth quarter of 2023, gradually declining to 6.3% by the end of 2024, the trade association predicts in its October Economic Outlook.
“This decline in mortgage rates will be a welcome relief to homebuyers, and potential sellers and consumers on the sidelines are very likely to rebound into the market at that time,” says NAR deputy chief economist Jessica Lautz in an Oct. 26 statement.
Mortgage Bankers Association: 7.2%
MBA revised its expectations upward in its October Mortgage Finance Forecast. Previously, it had expected the 30-year fixed rate to fall below 6% by the end of 2023, but the industry group now predicts the average rate will stay above the 6% threshold until 2025.
“Both fiscal and monetary policies have contributed to the much higher level of mortgage rates in 2023,” says MBA chief economist Mike Fratantoni in an Oct. 15 statement. “The Fed’s hiking cycle is likely nearing an end, but while Fed officials have indicated that additional rate hikes might not be needed, rate cuts may not come as soon or proceed as rapidly as previously expected.”
Wells Fargo: 7.3%
In its latest U.S. Economic Outlook, Wells Fargo puts the 30-year conventional mortgage rate at 7.3% in the fourth quarter of 2023, declining somewhat to 7% at the beginning of next year. The bank’s forecasting group predicts that rates will fall below 6% at the end of 2024.
Why Mortgage Rates Are Expected to Stay High
Stubbornly high mortgage rates are a byproduct of the Fed’s battle to bring annual inflation back to its 2% target amid positive economic growth, despite the pressures of rising interest rates. The central bank raised the federal funds rate seven times in 2022 and another four times so far in 2023, with the latest 25-basis-point rate hike coming at its July meeting.
It’s not clear whether the Fed will raise rates again before the year is out, although investors don’t expect another rate hike in 2023. During the Fed’s November rate-setting meeting, policymakers voted to hold the rate steady at 5.25% to 5.5%, and MBA’s Fratantoni says the central bank “is likely to pause at this level for some time” before moving to cut rates in the second quarter of 2024.
“If the Fed does indeed move to cut rates next year and signals its intent to do so, mortgage rates should trend downward,” Fratantoni says. “Our forecast calls for this to happen, which would support a somewhat stronger spring housing market.”
Another contributing factor to today’s high mortgage rates is the abnormally large spread between the 30-year fixed mortgage rate and the yield on 10-year Treasury bonds. That spread is historically around 1.7 percentage points, but it’s currently closer to 3 percentage points due to high levels of volatility on the investor side.
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