The Million-Dollar Question: “When Will Mortgage Rates Go Down?”
Lots of people have answers, but none of them are necessarily correct. This gives them an opinion, or educated guess at best.
Here we discuss what could happen to lower mortgage rates, and when it might happen.
The bad news is that things may get worse before they get better, as the Fed recently said it has “some way to go” in the fight against inflation.
This means that even though there is hope on the horizon, mortgage rates could climb higher before much needed relief is seen.
The Fed Is Still Fighting Inflation
Yesterday, the Federal Reserve raised the fed funds rate Another 75 basis points (0.75%) for a target range of 3.75% – 4.00%.
This is basically their tool to control or fight inflation, and they have used it many times in 2022 after many years of a very accommodative rate policy.
This came as a surprise to no one, as these moves are very telegraphed.
However, at the same news conference, Fed Chairman Jerome Powell noted The supply of available job opportunities was greater, which usually spurs wage growth.
As workers are paid more, costs go up for consumers, leading to more inflation, which they have been actively fighting.
In other words, the Fed may need to keep raising its own fed funds rate until “substantially restrictive,” Powell said.
Still, we may be close to being done with rate hikes, with only a 1% increase left between now and the beginning of 2023.
If the data cooperates between then and now, we could see another 50-basis point increase in December, followed by 25-basis points in January and March of 2023.
Guess it’s the end mortgage rate Might take the hint soon and start moderating.
After all, fixed-rate mortgages compete with longer-term securities (since they’re typically held for a decade) like 10-year Treasuries.
And they are pricing in using future rate expectations and forward-looking economic data, which, if positive, could allow them to drop before the Fed ends its tightening policy.
If the Fed softens, mortgage rates could fall even as the fed funds rate rises.
Economic pundits often think that the Fed has been slow to react, and unable to look far into the future. This is why the Fed rarely surprises us.
But the prices of most things, including mortgages, are often already baked into the future, and are looking for additional signals to determine their direction.
Simply put, almost everyone (including bond investors) knows that the Fed will continue to raise its fed funds rate through early 2023.
They also expect the Fed to stop tightening around that time, which means they can technically start to reassess on that expectation while the Fed is still doing its job.
However, the Fed is being a bit hesitant and dancing between dovish and hawkish tones, which is keeping everyone guessing.
And you don’t want to go wrong and lower rates, only to see another high inflation report that will demand a more aggressive Fed.
This may explain why little bits of good news haven’t done much to turn down the dial, while any whiff of bad news is enough to push mortgage rates up even higher.
Still, if and when the Fed provides more clear signs of slowing inflation, interest rates should decline.
And that could happen even if they are raising the fed funds rate next month and beyond.
Because only the hope that the worst is over can drive mortgage rates down again.
How much will mortgage rates fall? and when?
Last month, I wrote Sub-5% Mortgage Rates Likely By 2023, It’s based on a theory by mortgage rate expert Barry Habib.
In short, they believe that the faster inflation has risen, the faster it can decline, and with it, interest rates.
people are worried about the other piece end of quantitative easing (QE), which was the Fed’s massive bond and mortgage-backed securities (MBS) purchase program.
But Habib also points to very low loan origination volumes recently, which offset the Fed’s lack of buying when QE ended.
Together, these developments could drive mortgage rates down significantly within a few months, assuming all goes according to plan.
If it turns out that inflation is relatively short-lived, and is dealt with through these Fed rate hikes, then a case is made for seeing mortgage rates go back down.
The caveat is that mortgage rates will not return to 2-3% or even 4%, but will still provide serious relief from current levels.
And it makes sense when you sit back and think about it. Certainly, the 3% 30-year fix in the grand plan was historically very low, which explains the excess housing demand in 2020-2021.
But a 30-year fixed price at say 4.875% is reasonable today and historically, and high enough to allow the transaction to go through again.
not so low that demand will go crazy again, bidding wars and so on, but low enough for first time home buyers to qualify again.
And for move-in buyers to rationalize leaving behind their 3-4% mortgage rate when they buy a new home they need/want more.
It will happen at some point, but the question is, will it be before or after the spring home buying season?
It’s hard to say, especially with how skittish it is at the moment with mortgage lenders and bond investors.
Most still seem reluctant to lower their rates even though good news is in the pipeline, meaning this development may take longer to happen.
At this point, mortgage rates still have the potential to get worse before they get better, even though we know they will eventually get better.
(Photo: Dejan Karsmanovic,