May 12 2022

What To Expect for Interest Rates

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 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. 

These days, more and more people are looking to buy their dream homes, especially as remote work and work-from-home setups have become an enduring trend. A 15 point increase in requests for home tours and other home-buying services, along with a 11% rise in Google searches for homes, indicate an uptick in demand to buy houses in the country. However, there is a definite worry about affordability when it comes to housing, especially as hefty price tags on available residences have kept the market just as competitive as before, if not more.

According to the latest reports from analysts, it’s not all bad for existing homebuyers and aspiring house hunters. As previous data shows, timing matters in the housing market, and working on different approaches to home buying – like through a reliable lender – can help advance you towards more affordable housing goals. Below, we discuss whether house hunters should buy now or wait, and why.


What is your financial situation?

Counter to the rise in home demand, there is a considerable lack of supply. Along with rising prices and interest rates, the housing market may seem like a highly competitive space with wealthy homeowners fighting for what little property is left. It can be overwhelming, but knowing where you stand financially can help you better strategize your home buying journey. Following the four key components of affordability, ask yourself:

  • How much do you have saved for a down payment?

  • How much does your household earn?

  • What debts do you carry?

  • What is your credit score?


Familiarizing yourself with these components will help inform your decision on whether or not to wait. For example, taking the time to improve your credit scores before committing can save you from higher interest rates in terms of your monthly mortgage payments. Alternatively, many young homebuyers are compromising by living with family for a significant amount time to save up for a down payment. Getting this out of the way when you’re able to can help you get better loans to buy sooner than later in case interest rates end up increasing.

What kind of home is best for you?

Buying a home is a huge purchase and a big commitment. With shifts to digital and remote ways of working taking place in recent years, this has provided homebuyers with opportunities to be more flexible when buying homes. Homes in areas away from busy cities and urban hubs, for example, are considerably cheaper. This makes them a perfect option for buyers who work from home, or aren’t required to be present in the office on a consistent basis.

The lifestyle you expect to live is as much a factor to consider as money. Condos and townhouses offer lower maintenance costs in the long run, and are perfect for smaller households when compared to single-family homes. If the household grows, homebuyers looking for a side income can even invest in renting out purchased properties to passively earn back what they spent and look into bigger properties for family use.

What does the future look like?

In a previous post, we talked about the rising mortgage and interest rates. While the market may seem bleak or intimidating in its current condition, housing experts also believe factors such as supply have a high chance of returning to pre-pandemic levels by the end of 2024. If you are financially able, buying now while others may be intimidated by the prices can give you an edge. Conversely, taking some time to get your finances in order can benefit you when it comes to securing better loans and lower interest rates.

Working with experts can help you make better decisions for the loans you need, making sure you don’t get trapped with high interest rates or hidden charges. The future of fintech suggests that big data is the future of loans, as more online lenders are now using algorithms, which predict potential defaults better than FICO scores do. Data is also leveraged precisely to identify customers who fit various products well — which can give you peace of mind, as an aspiring borrower. Here at City Lending for example, we find the right programs to fit your needs and profile, making sure you get some of the lowest down payments and interest rates along with a premium service.

And if you’re still unsure, it’s worth considering that waiting it out in the market’s current wild conditions could result in even higher interest rates in the future. At the end of the day, buying a house is ultimately a huge investment, which comes with benefits such as privacy and a financial investment that for the most part will weather most economic storms.

Find out if this is the right time for you to get a house by contacting one of our loan officers today.


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Written by Alicia Christopher

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