Fed PolicyHousing MarketMortgage RatesPolitics & Money

Mortgage rate relief won’t come until end of 2023 (or later), housing economists say

Prospects for a rate cut this year look unlikely at this point

After a slight decline this week, mortgage rates are expected to stay at their current elevated levels for a while in reaction to the Federal Reserve‘s (Fed) decision to pause its tightening monetary policy in June. In turn, mortgage origination volumes will remain under pressure for the remainder of the year.

The Freddie Mac’s Primary Mortgage Market Survey, which focuses on conventional and conforming loans with a 20% down payment, shows the 30-year fixed rate averaged 6.69% as of June 15, down from last week’s 6.71%. The 30-year was at 5.78% a year ago at this time. 

Other indexes also show rates trading on the sidelines. The 30-year fixed rate for conventional loans was 6.97% at Mortgage News Daily on Thursday morning, down one basis point from the previous day. HousingWire’s Mortgage Rates Center showed Optimal Blue’s 30-year fixed rate for conventional loans at 6.71% on Wednesday, compared to 6.70% the previous day.

“Mortgage rates decreased slightly this week in anticipation of the pause in rate hikes by the Federal Reserve,” Sam Khater, Freddie Mac’s chief economist, said in a statement.  

Officials at the Fed decided in their June’s meeting to maintain rates in the 5% to 5.25% range, following 10 consecutive hikes. Policymakers want to assess how much banks reduced lending levels due to the recent tumult in the sector and evaluate the impact of their rate hikes so far – including in the housing sector. 

Fed Chairman Jerome Powell told journalists that housing, a very interest-sensitive sector, it’s the first place that’s “either held by low rates or is held back by higher rates.”

“We now see housing putting in a bottom and maybe even moving up a little bit. You know, we are watching that situation carefully. I do think we will see rents and house prices filtering into housing services inflation. And I don’t see them coming up quickly. I do see them coming kind of wandering around at a relatively low level now.” 

The Fed indicated the federal funds rate will end the year at the 5.6% level, which opens the door for two rate hikes in 2023. The reason for more rate increases is the disappointingly slow decline in core inflation so far this year. 

According to Powell, “Not a single person on the Committee wrote down a rate cut this year, nor do I think it’s at all likely to be appropriate.” 

Analysts at Goldman Sachs said they had not changed their forecast of one additional hike in July to a peak rate of 5.25-5.5%. 

“The combination of the hawkish surprise in the dots and the hint at an every-other-meeting pace strengthens our confidence that the FOMC will hike in July and makes a possible second hike more likely in November than September, though neither is in our baseline forecast,” the analysts wrote. 

Higher borrowing costs – for a while 

In the housing market, the Fed’s actions mean borrowing is likely to remain expensive for the remainder of the year, according to the Realtor.com economic data analyst Hannah Jones. 

“Both housing supply and demand remain stifled by affordability constraints. Mortgage rates have been on the high end of the 6-7% range since the beginning of June and home prices have made their typical seasonal ascent, though less aggressively than in summers past,” Jones said in a statement. 

According to Jones, the national median listing price fell year-over-year for the first time in the data’s history last week as sellers adjusted their asking prices to attract buyer demand. 

“Despite this annual price decline, homes in many areas are out of the feasible price range for many buyers and still-high interest rates are discouraging homeowners from giving up their current mortgage rate and listing their homes for sale.” 

Industry economists believe mortgage rates will trend down only at the end of the year. 

“As inflation continues to decelerate, economic growth is slowing and the tightening cycle of monetary policy is reaching its apex, which means mortgage rates are expected to decrease later this year and into next,” Khater said. 

Higher rates are impacting mortgage lenders’ production. Analysts at Keefe, Bruyette & Woods wrote in a report, “Mortgage volumes are likely to remain under pressure throughout the rest of 2023, given rates remain in the neighborhood of 7%.” 

“Additionally, it is unclear how much more capacity needs to be removed from the system, although the exit of Wells Fargo from the correspondent channel has been a meaningful positive,” the analyst wrote. “So, while we remain somewhat cautious on the originators, we would acknowledge that the backdrop has improved.”

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