Mortgage rates fell to an all-time low of 2.65% in 2021. Now they’re more than double that, and everyone is asking the same question.
Will mortgage rates drop in 2023?
Let’s break it down.
Why are mortgage rates so high?
Mortgage rates are influenced by several factors, the foundation of which is the overall state of the economy. When the economy is doing well and moving fast, rates are typically higher. When the economy is sluggish, rates are usually lower. Seem backward? Here’s why it works that way:
Many people think that the Federal Reserve (also known as “the Fed”) sets mortgage rates, but that’s not quite true. The Fed sets the federal funds target rate, which guides the amount that banks charge each other to borrow money and impacts the rates they charge consumers, too. That’s because it changes the amount banks need to cover their own costs.
Why does the Fed ever raise rates? Everyone likes a lower interest rate—right? The Federal Reserve has two jobs, called its “dual mandate,” as assigned by Congress. It must act to keep prices stable in the economy and to support maximum employment. One of the ways it does this is by moderating interest rates to support a stable financial system (O’Connell, 2023).
When the economy is slow—like it was during the initial COVID-19 crisis—the Fed lowers its rates to increase cash flow and encourage consumer spending. For example, in April 2020 during the early stages of the crisis, Raleigh’s unemployment rate was a whopping 14.2%, and consumer spending fell dramatically across nine major categories. At that time, mortgage rates also fell to around 3.3%—about a percentage point less than a year prior in April 2019. This move made it less expensive to borrow money, encouraging cash flow during a period of economic struggle.
But when the economy is doing well and moving fast, borrowing, consumer spending, and demand are all elevated—which can cause inflation. A major problem with inflation is when prices rise at a rate with which salaries don’t keep pace, people suddenly can’t afford to buy things, and the economy grinds to a halt. For that reason, when the economy is moving too quickly and inflation is growing unsustainably, the Fed increases the federal funds rate to constrict cash flow.
The idea is that higher rates—while uncomfortable—will slow spending to a sustainable pace while preventing an economic crash down the road. Since the housing market, consumer spending, and inflation all hit peaks in late 2022, the Fed pumped the brakes with interest rate hikes in an effort to divert a full-blown recession.
Will mortgage rates drop in 2023?
Now that we know why rates are so high, we can make an educated guess about their future. Many experts suggest that 2023 will see a slowdown in the U.S. economy, and if that’s true, mortgage rates will drop as well.
Will mortgage rates go down in 2023? Here are the detailed answers from top industry experts:
Mortgage Bankers Association
The Mortgage Bankers Association has stated that “long-term rates have already peaked. We expect that 30-year mortgage rates will end 2023 at 5.20%.” As of this writing, the average APR for the benchmark 30-year fixed-rate mortgage is over 7%, so that prediction represents a significant drop by 2023’s end.
National Association of Realtors
The NAR Director of Forecasting, Nadia Evangelou, predicts that “mortgage rates likely will settle below 6% and experience less volatility this year.” She continued by saying that “Although rates remain more than double a year ago, they will likely stabilize as inflation will continue to slow down in the coming months.”
Analysts at Goldman Sachs are less optimistic, predicting that mortgage rates will average 6.5% in 2023. Why this rate? The investment bank expects a “significant decline in U.S. inflation,” but also notes “that the rapid decline in mortgage origination, especially refinances, has caused some lenders to exit or scale back lending. This has the potential to allow the remaining lenders to expand their margins by pushing mortgage rates higher” (Lambert, 2023).
In its most recent forecast, Freddie Mac predicted that the 30-year fixed-rate mortgage will average 6.4% in 2023, with a lower average of 6.2% in the fourth quarter. The financial company cited the job market, moves from the Fed, and the decelerating housing market.
In its U.S. housing market outlook forecast, Morgan Stanley predicts that 30-year fixed mortgage rates will average 6.2% in 2023. In a best-case scenario, the investment bank writes that mortgage rates could fall below 6%, but that would require the Fed to successfully tame inflation sooner than expected (Lambert, 2022).
Bankrate’s chief financial analyst, Greg McBride, CFA, forecasts mortgage rates to fall to 5.25% by the end of 2023. He explained that “we should see a notable pullback in mortgage rates as inflation pressures ease and as the economy slows” (Ostroski, 2023).
Financial and real estate industry experts agree that mortgage rates will fall in 2023. By how much? That’s still up for debate, with some experts forecasting a nearly 2% drop and others one of less than 1%.
No matter the number, lower mortgage rates represent relief for buyers struggling with affordability. Raleigh’s housing market experienced some of the country's most explosive growth and highest appreciation rates in the last several years. Coupled with high interest rates, this has put homeownership goals on hold for many.
But if you’ve been waiting to buy due to high home prices and high mortgage rates, get ready. Lower rates are on the horizon—and when it’s time to buy, you’ll want to make sure you do everything you can to bring them even lower. That means working on your credit score, looking into a rate buydown, and shopping around to find the lender with the best terms for you.
Let’s buy your dream home in 2023
If falling mortgage rates are music to your ears and you’re ready to buy in 2023, get in touch. Not quite sure about the next steps? The Coley Group can help. We’re the #1 Compass team in the Triangle, and we’ve lived and worked here for over two decades. We know this region inside and out and can connect you with trusted lenders and more. Fill out the form below to get started.
Ready to buy and not sure where to start? Give us a call at 984-217-2752 to find out how we can help!