The majority of today’s homebuyers are staring down one undeniable fact: interest rates are rising. The heyday of historically low rates is over, and we’re faced with the new reality of mortgage rates that are closer to historical norms. How high will they go? Will they ever come down again? Let’s look at the current state of mortgage rates and at where experts see them going.
The Fed is Having its Say
In a widely expected move, Federal Reserve Chairman Jerome Powell recently announced that the central bank is looking at a rapid increase in interest rates this May, a move that’s meant to help curb inflation and cool off the economy. In March, Fed officials forecasted they would make seven rate increases of a quarter-point each — and now that number looks likely to be nine. Market watchers are predicting that rates will be close to 3% by the end of this year.
While moves by the Federal Reserve and mortgage interest rates aren’t directly linked, there is an indirect connection that both borrowers and lenders watch closely, as mortgage rates and the federal funds rate often go in the same direction. But policy set by the Fed is only one factor in determining mortgage rates; the rate of inflation, the number of jobs created, and the expansion or contraction of the overall economy are contributing factors. The Fed may serve as a reliable bellwether, but it’s not a crystal ball.
Homebuying Has Been Impacted
The busy spring home-buying season has had a gathering cloud hanging over it: seven consecutive weeks of increases in mortgage rates. According to Freddie Mac, by the third week of April 2022, the average 30-year fixed-mortgage rate was 5.11%, the highest we’ve seen in over a decade; it hit 5.21% in April 2010. Mortgage News Daily reports an even higher number: 5.35% in the third week of April 2022. A year ago, in April 2021, the average was just 3.2%.
This rise in mortgage rates has outpaced the forecasts of several industry insiders. Just before 2022, the Mortgage Bankers Association predicted that the average 30-year fixed rate would be 4% by the year’s end, and Fannie Mae predicted that the rise over the course of 2022 would peak at 3.3%. We’re already beyond those forecasts and all signs say the increases aren’t over.
What do rising mortgage rates mean for the housing market?
It’s helpful to take a snapshot of current market conditions to give context as to where the housing market is likely headed. According to the National Association of Realtors, in March 2022, the median price for a single-family home was $375,300, a record number that’s about 15% higher than the median price one year prior. Experts say that the rise in mortgage rates and shrinking home inventory, due in part to supply chain issues, contributed to the jump in prices.
A Glimpse into Next Year
What will the cost of homes look like in 2023? While the market may just go from white-hot to toasty, housing experts are predicting something of a cool down. Zillow recently predicted that we’ll see 14.9% growth in home value over the next year. While that may not sound like a cool down, a month prior, Zillow’s estimate was 17.8%. This downgrade seems a direct result of rising interest rates that have made home buying less affordable for many. Others are predicting a more significant cooling: CoreLogic thinks home prices will decrease to a growth rate of 5% over the next year; Fannie Mae forecasts a rise of 11.2% by the end of 2022, and a 4.2% rise in 2023.
Looking Beyond 2023
If you think that the current rise in mortgage rates is just an anomaly that will soon self-correct, with a return to historically low interest rates on the near horizon, you may be at odds with most folks. A survey by the New York Federal Reserve found that a majority of households think that the average interest rate for a 30-year fixed-rate mortgage will rise to 6.7% in 2023 and to 8.2% in 2025. Do experts agree with these consumers? The National Association of Realtors predicts a more moderate rise, with the average 30-year rate falling between 5% and 5.5% in 2023. Fannie Mae agrees, predicting that we’ll be at 5% in 2023. The Mortgage Bankers Association forecasts a decrease in rates beyond that, with the average falling to 4.6% in 2024.
How will the housing market react to these and other changes in the coming years? Zillow recently posed that question to over 100 housing market experts and economists. On average, survey respondents predict the growth of home value to rise at a rate of 4.9% per year, culminating at 26.8% by the close of 2026. The majority of these experts believe that housing inventory, which has recently seen a significant drop, will be back at pre-pandemic levels by the close of 2024.
Some Historical Perspective
According to the Washington Post, the United States is currently experiencing the highest inflation we’ve seen in the past four decades; the Federal Reserve is betting that higher interest rates will tamp that down. But this increase in rates is not unprecedented, or even exorbitant in historical terms. The National Association of Realtors estimates that 8% is the historical average for a 30-year fixed mortgage. In 1981, the United States saw one of the worst economic downturns since the Great Depression. Both inflation and unemployment soared, and the Fed raised interest rates in response — the average 30-year fixed mortgage rate then topped 18%. Even the most bearish predictions for rates in the near future don’t come close to that.
All parties meet their ends, and so nobody expected the abnormally low interest rates of the past few years to go on forever. The post-party days mean normalization, and affordable rates that aren’t historically low or high. And when you’re ready to secure one of these affordable rates, loan originators at City Lending are ready to help you finance your dream home.
