Mortgage rates fell for the ninth consecutive week, dropping to their lowest level since May 2022 and providing some relief for the struggling housing market. The average 30-year fixed mortgage rate declined to 6.61%, the lowest it has been since early May when it was 5.1%. This extended decline in rates offers a glimmer of hope for potential homebuyers and signals that the housing market slump may be nearing its end.
Steady Decline Since Fall Peak
Rates have plunged from their fall peak of 7.08% in October and are down more than 1.5 percentage points in less than three months. This pullback comes as inflation shows signs of easing and the Federal Reserve slows the pace of interest rate hikes.
After four straight 0.75 percentage point rate hikes from June through November, the Fed raised its benchmark rate by 0.5 points at its December meeting. Markets now expect the central bank to enact a 0.25 point rate hike at its next meeting in February. Lower bond yields amid expectations of less aggressive Fed tightening have paved the way for cheaper mortgage rates.
“Mortgage rates followed Treasury yields lower after weaker-than-expected inflation numbers gave hope that the Fed’s barrage of rate hikes could soon be over,” said Matthew Graham, chief operating officer at Mortgage News Daily.
| Month | 30-Year Fixed Mortgage Rate |
|---|---|
| May 2022 | 5.1% |
| October 2022 | 7.08% |
| December 2022 | 6.61% |
While mortgage rates are unlikely to fall back down to springtime lows anytime soon, this steady downward trajectory since October peaks is a promising sign for housing after rates soared at their fastest pace in over 40 years this year. Some experts say rates could dip into the 5% range at some point in 2023 if inflation continues to cool.
“Inflation is clearly cooling, the Fed’s policy stance is becoming less aggressive, stock markets are rising, and bonds yields are falling quickly – all of which points to lower mortgage rates in 2023,” said Lawrence Yun, chief economist for the National Association of Realtors.
Green Shoots in Housing Data
In addition to lower rates, recent data also shows some tentative signs of improvement in the housing market after a dismal year.
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Pending home sales, which measure signed contracts to purchase existing homes, rose 2.5% in November compared to the prior month. This was the second straight month-over-month increase after eight consecutive months of declines.
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Mortgage applications to purchase a home increased 5% last week from the previous week and were 31% higher than the same week one year ago, according to the Mortgage Bankers Association. This shows renewed demand from homebuyers with lower rates.
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The inventory of unsold existing homes rose 2.3% in November to its highest level since June. More homes for sale will provide buyers with more options.
To be sure, higher mortgage rates have taken a severe toll on housing in 2022. Existing home sales are down over 35% from January and home prices have started to fall on a monthly basis after rising over 40% in just two years. Builders have all but stopped starting new construction projects with housing starts down 8.8% year-over-year in November.
However, lower rates ease some of the affordability pressures plaguing the market this year. And with signs that record home price growth is slowing, some potential buyers who have been waiting out 2022’s housing frenzy could return to the market in 2023.
Outlook for 2023
While higher rates crushed demand this year, the recent steady drop in mortgage rates paired with slowing inflation has sparked hope that the housing slump may be bottoming out sooner than expected.
Most housing analysts agree that lower mortgage rates will continue into 2023, which should stabilize prices and coax more buyers into the market. But a full-blown recovery still depends on inflation falling significantly from its 40-year highs so the Fed can stop raising interest rates.
“Much lower mortgage rates in 2023 are plausible if inflation keeps trending down and the Federal Reserve stops raising short-term rates – two key components for a rebound in home sales,” said Yun.
In its latest economic forecast, Fannie Mae predicts the 30-year fixed mortgage rate will average 5.2% in 2023 and 30-year rates will fall to 4.7% in 2024. That’s well below 2022’s expected average of 6.9% but still higher than rates below 3% seen in 2020 and 2021.
While mortgage rates are expected to remain above historical averages for some time, the steady drop since October is a telling sign for housing. If inflation keeps cooling in 2023, permitting less aggressive Fed policy, rates could fall enough to stabilize the housing market and allow a gradual recovery heading into 2024. Signs of that recovery taking hold are already starting to sprout.
To err is human, but AI does it too. Whilst factual data is used in the production of these articles, the content is written entirely by AI. Double check any facts you intend to rely on with another source.
