Why mortgage rates are likely to drop as 2023 housing outlook remains gloomy

Expect mortgage rates to decline next year but headwinds in affordability to persist, according to economists and mortgage experts

On the heels of the central bank’s announcement to raise the federal funds rate by 50 basis points to 4.25%-4.50% on Wednesday, most economists and industry experts were on the same page about the housing outlook and which direction mortgage rates would be headed. 

Growing concerns of a recession, led by the Federal Reserve’s continued interest rate hikes next year, will prompt mortgage rates to trend lower in 2023, according to numerous experts. However, activity in the housing market will remain depressed at least in the first half of next year as home affordability continues to be a challenge for homebuyers. 

According to Mike Fratantoni, senior vice president and chief economist at Mortgage Bankers Association, there are increased signs that the U.S. is headed for a recession next year.

“Weaker growth typically leads to lower long-term interest rates, including mortgage rates,” Frantoni said in a statement. 

Central bankers now expect unemployment to rise to 4.4% by the end of 2023, according to fresh projections, up from an estimate of 3.9% in September — when estimates were last published. Policymakers are also expected to lift borrowing costs to 5.1% by the end of next year, an increase from its projected 4.6% in September.

If recent trends continue with respect to consistent declines in inflation and an increasing risk of recession, we may be near the peak rate for this cycle, which is now expected to be just over 5%, Fratantoni said. 

“The MBA is forecasting that mortgage rates for 30-year fixed-rate loans, which were at 6.4% last week, are expected to drift down and end 2023 around 5.2%,” he said.  

Mortgage rates are taking the Fed’s move as a clear indication that the pace of interest rate increases will be moderate, and the market is hopeful that any increases in 2023 will be in the more typical 25 basis point increments, Marty Green, principal at Polunsky Beitel Green, law firm for residential mortgage lenders, said.

The 10-year Treasury note, which dictates mortgage rate movements, dropped to 3.49% on Wednesday from 3.51% on Tuesday after the Bureau of Labor Statistics released the Consumer Price Index, a timely inflation measure. 

Bond yields reversed course and headed lower when the Fed chairman Jerome Powell was speaking, Logan Mohtashami, lead analyst at HousingWire said. 

“This is the bond market saying to Powell, we don’t believe your lies, and the Pinocchio nose grew more extensive and more significant the more he talked today,” Mohtashami said.

While mortgage rates eased over the last few weeks, Danielle Hale, chief economist at noted that understanding the volatility in mortgage rates is important. 

Volatile mortgage rates meant that “shoppers have to visit and revisit their budgets to ensure they’re set appropriately,” Danielle Hale, chief economist at, said. 

“We expect higher rates are likely to stick around until inflation makes much bigger strides back toward the 2% target. But in a welcomed pace of change, we expect lower volatility in mortgage rates in the year ahead,” Hale said. expects mortgage rates to reach 7.1% by the end of 2023, dropping slightly from the projected 7.5% by the year-end. It projected mortgage rates to average 7.4% in 2023, up from the expected 5.5% in 2022.

“Now the market is waiting to see whether mortgage rates will rise to keep pace with the Fed’s half-point rate increase this week, or if mortgage rates will drop on expectations that inflation will fall even more,” Holden Lewis, home and mortgage expert at NerdWallet, said.

Not much good news for homebuyers

Activity in the housing market, the most interest-sensitive sector, as noted by Powell, isn’t likely to fully recover until at least the first half of 2023. Housing services inflation has been very, very high and will continue to go up before coming back down sometime next year, Powell said of the industry — which has suffered due to elevated home prices, a lack of inventory and high mortgage rates that have chilled activity.

While mortgage rates are largely expected to drop, the combination of the holiday season and both buyers and sellers remaining on a strike won’t bring any meaningful impact to the housing market, Brian Hale, CEO and founder of Mortgage Advisory Partners, said. Unless housing prices or interest rates drop to 4% or 5% levels, he doesn’t expect to see any material change in the housing market.  

The latest measure of mortgage demand, released last week, showed a rise in mortgage applications, but lower rates haven’t convinced home buyers to lock in their mortgage rates. 

Rate lock dollar volume was down 68% year over year, driven across the board by purchase locks, according to Black Knight. Headwinds from both interest rates and affordability continue to challenge purchase lending, with the dollar volume of such locks down 37% over the past three months — and down by more than 50% from November 2021.

An improved interest rate environment convinced some buyers to re-enter the market, but “activity is far below what was occuring in 2022 as home affordability, the transition of the residential real estate market, and the fears of a recession continue to significantly dampen demand for housing,” Green said.

Existing home median price appreciation is forecast to slow at 5.4% growth in 2023 from this year’s expected 10.2%, according to Existing home sales are also set to decline to 4.53 million units next year, down from the expected 5.28 million units.

Existing-home sales, which have fallen each month since January as mortgage rates surged on the back of the Federal Reserve’s aggressive campaign to hike interest rates to control inflation, are projected to slide by another 6.8% to 4.78 million in 2023.

The National Association of Realtors forecasts existing home sales to slide by another 6.8% in 2023, dropping to 4.78 million. The median transaction price for homes is expected at $385,000 next year, more or less flat by supply constraints, the NAR said.

“Next year will be a tale of two years — the first half of 2023 will be very difficult because even If rates drop, it takes time for borrowers to notice, sellers to adjust their price, a deal to get signed and a deal to get financed,” Hale said.

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