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U.S. News interviewed top housing economists about their mortgage rate predictions and housing market outlook for 2023.

By Erika Giovanetti. Jan. 13, 2023 via US NEWS

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.”

ERIKA GIOVANETTI

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.”

Why Mortgage Rates Are Expected to Drop This Year

Forecasters interviewed by U.S. News predict that mortgage rates will begin the year higher, falling by year-end. That’s due to the widespread belief that inflation has peaked as the Federal Reserve slows the pace of its benchmark rate hikes. And rate hikes aren’t the only tool the central bank has been leaning on to fight inflation – the Fed also began selling off mortgage-backed securities and Treasury bonds last year to reduce the size of its balance sheet, which put even more upward pressure on mortgage rates in 2022.

“Looking at history when there’s a rapid rise in rates, traditionally there’s a bit of a recovery, almost a regression to the mean,” says Redfin’s Marr, adding that sub-3% rates were “a bit of an anomaly.”

ERIKA GIOVANETTI

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Experts Weigh In: How Rates Will Impact the 2023 Housing Market

Affordability Will Remain a Top Concern for Buyers

“Even with a 6% mortgage rate, (first-time) buyers still earn $30,000 less than the income needed to purchase a starter home. As a result, less than 20% of the renters can afford to buy a starter home. Thus, homeownership rate may continue to fall in 2023 as the share of first-time homebuyers will likely shrink even further from the 2022’s all-time lows. Housing affordability is going to be the main driver of the housing market in 2023.” – Evangelou, NAR

“We are seeing more homes available for sale, which is helping, but they’re still listed for sale at higher prices than we saw a year ago. Combined with higher mortgage rates, it’s going to be a challenging market.” – Hale, Realtor.com

“Even with prices falling and rates falling and incomes growing at still faster rates, we still expect a hurt with affordability relative to 2019 or even 2021. Affordability overall is still not going to see that much of an improvement.” – Taylor Marr, Redfin

“Because affordability is really the issue in the market today, the more affordable markets will see relatively healthier levels of activity. People moving from really expensive markets to more affordable markets can see their mortgage payments stay the same, if not lower.” – Divounguy, Zillow

 

Inventory May Improve, but There’s Still a Housing Supply Shortage

“We still have this big-picture, long-term housing shortage where we’re just not building enough housing to keep up with the number of households we have in this country, and it’s not going away. We’re seeing a temporary pullback in demand that’s brought about some better balance, but if demand were to rebound to normal, which we expect as inflation is reined in and the market normalizes, you’re still going to have that tightness in supply. Yes, the market will be in better balance, but it’s largely because we’re going to have less demand and not really because we’ve addressed the fundamental supply issues that we have.” – Hale, Realtor.com

“We were undersupplied going into the pandemic, and that unexpected demand boom just made things a lot worse. The slowdown in building of late is certainly not going to help the supply issue. If we do see rates continue to fall, we’re still going to need that supply.” –Joel Kan, MBA

“We have a record number of homes under construction in the United States. In almost every neighborhood, there’s construction, there’s unfinished projects. Those are going to come on the market and help with that inventory. … Inventory is slowly creeping up but is still much lower than it was before the pandemic.” – Divounguy, Zillow

Current Homeowners Will Remain Reluctant to Sell

“You have a lot of existing homeowners who bought in the past two or three years who have lower mortgage rates than what’s out there now. That’s one sort of wild card to see if or when these people might sell and lose their lower mortgage rate. Who might be willing then to buy a home even at a 5% mortgage rate? You certainly have buyers who don’t have to forgo a lower rate, like first-time buyers and renters, and for them, the right kind of home and right mortgage rate might be manageable from an affordability standpoint.” – Kan, MBA

“As mortgage rates come down, we’re going to see a lot of potential sellers who had been locked into their really low rates. A decrease in mortgage rates will help to facilitate that a little bit because 70% of sellers end up buying again. If affordability is a problem for buyers, it’s also a problem for sellers.” – Orphe Divounguy, Zillow

“The tightest supply is at the lower price end of the market. Those buyers are looking for smaller houses and condos. The lower rates are holding up those move-up buyers who are looking at holding onto a townhome as an investment property. We’re anticipating that a lot of these homeowners will stay in place or they won’t sell their entry-level units.” – Kan, MBA

“Homes are going to sit on the market, and that’s going to make it look like there’s more homes for sale, but that’s not necessarily going to change the number of homes for sale that are available to buyers. What we will see is less competition from other shoppers.” – Hale, Realtor.com

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