Will Mortgage Rates Go Back Down?
Many of my clients are either actively or passively looking for a home and ask me often if I think mortgage rates will decrease in the near future. As 2023 progresses, it's becoming clear that mortgage rates in the 7% to 8% range are here to stay. In this blog post, let's break it down and explore why mortgage rates may not be going back down anytime soon.
Inflation is Still High
The Federal Reserve has raised interest rates repeatedly through 2022 and into the first half of this year to cool inflation. This dramatic increase in rates seems to be finally having the intended affect as inflation for June 2023 was just above 4%, vs the 9% from a year ago. Lower inflation is good for everything else you are buying (and has slowed the increases in home prices), but the higher interest rates have also increased the mortgage rate. The Federal Reserve would like the inflation rate to be closer to 2%, so continued smaller increases in interest rates will keep occurring. This will keep mortgage rates higher as well.
2. There Aren’t Enough Houses
The demand for homes is off the charts, driven by limited housing inventory, and the working from home dynamics that shifted population all over the country. We've all seen how crazy the housing market can get! While low-interest rates contributed to this frenzy, the scarcity of available homes continues to drive prices up. People who have locked in the lower mortgage rates are not inclined to sell, which is also dampening the regular trading up in housing that would occur. With all that demand and limited supply, lenders don't have much incentive to lower mortgage rates since they can make a good profit as things stand.
3. Long-Term Market Expectations: Predicting the Unpredictable
While it feels like the mortgage rates have increased at the same proportion as the Federal Reserve has raised interest rates, mortgage rates are also influenced by what the market thinks the future holds. Most mortgages last an average of seven years and behave like a longer term bond. Historically, mortgage rates were most closely tied to the performance of 10-year Treasury bonds. The 10-year Treasury yield is just under 5%, which means the market believes that interest rates will remain higher over the next decade and so will mortgage rates. No one can predict the future, but all signs point to mortgage rates that are more in line with the historical average of 7.76% (see chart below).
It looks like the era of low mortgage rates might be coming to an end in 2023. Factors like economic uncertainty and inflation, housing demand and competition, and long-term market expectations suggest that mortgage rates won't be decreasing anytime soon.
As you navigate this evolving landscape, keep a close eye on these factors and consider how they might impact your mortgage plans. Being proactive, exploring alternative financing options like an adjustable rate mortgage (ARM), and timing your real estate transactions wisely can help you make informed decisions in an environment of potentially higher mortgage rates. And remember that your Smart Sister is always here to help you navigate a housing decision based on your unique goals and circumstances.