Despite mortgage rates falling for the first time since mid-August, experts are warning the higher borrowing costs that have tanked the housing market this year could stick around for at least another year—and perhaps even longer depending on how the Federal Reserve’s battle against inflation pans out in the coming months.
The average rate on a 30-year fixed mortgage ticked down 4 basis points to 6.66% last week, falling for the first time in six weeks as a result of ongoing economic uncertainty, Freddie Mac reported Thursday morning.
Despite the decline, the mortgage giant noted that rates remain “quite high” compared to when they were at less than 3% one year ago—contributing to rising housing costs that have driven up the average monthly mortgage payment by $840, or 56%, over the past year.
In a Wednesday note, Wells Fargo economist Charlie Dougherty pointed out the rising mortgage costs are mostly attributable to the Fed’s aggressive tightening campaign, and that though the central bank doesn’t directly control mortgage rates, it does influence 10-year Treasury yields that sway borrowing costs.
The “fiercely hawkish” Fed is one reason Dougherty expects mortgage rates will remain above 6%—still double what they were one year ago—through the fourth quarter of 2023, and even if inflation subsides enough to allow the Fed to tone down its interest rate hikes, the economist still believes mortgage rates will likely remain above 5% throughout 2024.
Though underlying demand remains strong, higher financing costs are likely to “weigh heavily” on housing activity over the next several years, especially as unemployment rises to help achieve the Fed’s inflation goals, the economist warns.
As a result, Wells Fargo projects existing home sales will fall to 4.7 million in 2023 (on an annualized basis), down from a peak of nearly 6.5 million this year; it also says housing supply faces a similarly “daunting” outlook since many homebuyers refinanced at rates just over 5% last year, making them unlikely to sell their homes while rates remain elevated.
One bright spot for buyers: Wells Fargo projects the housing market downturn will help home prices fall 5.5% in 2023, with high amounts of regional variation pulling down the prices of some pandemic hot spots the most.
The Fed’s interest rate hikes have hit the housing market hard, but recent data has shown a potential—and perhaps temporary—respite. New home sales unexpectedly surged much more than economists projected in August; however, data has also shown prices collapsing due to a dearth in demand. In a statement, John Fish, the CEO of building giant Suffolk Construction, said the volatility in home sales is a “possible indicator we are in the early stages of a recession,” though he added it’s “too soon to predict how long or severe” the recession could be.
What To Watch For
Mortgage rates will likely drop by 30 to 50 basis points over the next couple of weeks, predicts research firm Pantheon Macro, noting that they tend to lag 10-year Treasury yields. However, those yields have surged by about 20 basis points since Tuesday, making it unclear how long the decline may last.