Mortgage Interest Rate Forecast, Housing Outlook 2023: Economist


  • Selma Hepp says the Fed’s fight against inflation could be made more difficult by the housing market.
  • The majority of forecasters estimate that mortgage rates will peak between 6.8 and 6.9%.
  • Idaho, Utah, Nevada, Arizona and Texas could experience the most price corrections in house prices.

On Thursday, the average 30-year fixed mortgage rate continued to hover just below 7%, with the highest since 2002. The 15-year fixed rate was 6.36%. Both rates were almost double what they were a year earlier.

As debt becomes more expensive, investors and future owners are reluctant to take on new properties. The Pending Home Sales Index (PHS), which measures housing contract activity on signed contracts for existing single-family homes, condos and co-ops, fell for the fourth consecutive month: The September PHS measured at -10.2%.

Selma Hepp, acting chief economist at CoreLogic, a real estate data company, isn’t surprised it’s a market recovering from the unusually strong demand seen in 2020 and 2021, she said. note.

“So housing markets are now resetting to settings where mortgage rates are higher, housing affordability is at an all-time low, and so a lot of people, potential buyers, are no longer able to pay for the houses.”

Hepp has been a housing economist for about 15 years. Right now, her eyes are on the Federal Reserve and its persistence in fighting inflation. The hawkish approach has significantly raised projected mortgage rates for this time of year, she noted.

But the central bank’s goal of bringing inflation down to 2% could be made more difficult by the housing market, she added. Housing accounts for about 30% of the inflation measure. Yet the housing indicator, or house price inflation, is lagging because of the way it’s measured, she said. It takes between nine and 12 months to capture the housing inflation component, she added. Indeed, the entire rental market is monitored, and not just new leases.

The bad news is that Hepp believes housing inflation will continue to rise and won’t peak until the summer of next year. The good news is that there is a slim chance that mortgage rates will peak above 7%, she said.

“We are looking at forecasts from five outside companies or organizations that focus on forecasting mortgage rates and the majority of them see mortgages peaking at 6.8, 6.9% in the last quarter of this year,” said said Hepp. “And then gradually declining to around 6.3% until the end of next year.”

But due to economic volatility, the forecast has widened a bit. This means they could even return to 5.5% until the end of next year, she added.

Regardless of the severity of the surface economic environment, the housing market is in a much stronger position than it was during the 2008 financial crisis, she noted. Three major factors make this downturn very different.

First, underwriting standards have become increasingly stringent since 2008. That means homeowners had to meet higher standards to qualify for a mortgage, putting them in a much stronger position this time around, a- she declared.

Second, due to the appreciation in house prices over the past two years, homeowners have much more equity in their properties. If they are forced to sell because they lost their jobs, for example, they don’t have to foreclose and might even walk away with a profit, she added.

According to data from CoreLogic, US homeowners with mortgages saw their net worth increase by more than $3.6 trillion since the second quarter of 2021 a gain of around 27.8% year-on-year.

“So this is a very significant difference from the last time people came in with no equity. So they didn’t put down payments and house prices then fell 60% on some markets,” Hepp said of the 2008 financial crisis.

Third, stocks are at historic lows. This creates a floor for house prices because there is still insufficient supply. About 95% of mortgages have an interest rate below 5%. This will deter many homeowners from selling their home to purchase a new property at higher interest rates.

However, it is important to note that there is a wide range of housing conditions depending on the market we are looking at, she added. Hepp advises caution in areas that have seen excessive house price increases over the past two years.

This year, the markets seeing the most declines from house price peaks are areas that have benefited from increased demand during the pandemic because people have fled expensive West Coast markets for areas of Mountain West. Those areas include states such as Idaho, Utah, Nevada, Arizona and Texas to some extent, she said.

“We are already seeing a decline in this migration,” Hepp said. “People are moving back to some of these west coast areas or heading to other more affordable markets in the southeast and south, so there’s not enough demand to sustain those price levels.”

Also, during the pandemic, single-family home prices rose at a faster rate than condos because people didn’t want to be in dense areas and close to others, she added. But since the middle of last year, after vaccination periods, condo price growth has started to match that of single-family homes, she added.

“There is more volatility in condo prices,” Hepp said. “They tend to be more reactive to cycles than single-family homes, so I think that’s still the segment of the housing market to be a bit more cautious about.”

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