Mortgage Rates Will Decline, Eventually

Mortgage Rates Will Decline

In the past year, we have seen mortgage rates increase at a historical rate. With rates going from record lows to the highest levels in decades in a few months, the real estate market is hard to describe now. Over the past 11 months, we have seen fewer homes sold per month than the month prior. This has also led to a decrease in home price acceleration. While home prices have started to decline in some markets for the first time in decades, prices are still elevated. All of this is because of mortgage rates increasing by more than double in 11 months. We also saw that the average rate of financing a home rise above 7%. Since then, we have seen rates come back down to the 6’s. This fits the narrative we are expecting, that mortgage rates will decline, eventually.

Inflation Expectations

Until we see inflation turn around in a more convincing way, we will see mortgage rates remaining high. As we have seen over the past couple weeks, we have seen a few indications of inflation having peaked. This allows us a glimpse into the future of where mortgage rates will be headed. As we saw during the release of the October CPI numbers, mortgage markets are waiting for positive inflation data. On that day, we saw rates across the curve dip, lowering mortgage rates to below 7%.

30-Year Fixed Mortgage Rate Average

According to Ali Wolf, Chief Economists at Zonda,

“The housing market is expected to face continued uncertainty heading into 2023 as consumers, financial markets, and policymakers work through their respective challenges in today’s economy. . . . we are watching for any additional stability in the MBS market, signs of cooling inflation, and/or less aggressive Federal Reserve action to give us confidence that mortgage rates are past their peak.”

Peak Rates?

As we continue to see more and more signs of inflation coming down, we will likely see a stabling in the mortgage rates. Once inflation is clearly coming down, we will likely see a decline in mortgage rates that actually means something. We have seen signs over the past few weeks, but we were in a similar situation during the summer. There is a growing suspension that the rally we have seen in bonds is unjust and will likely be reversed over the next few months. Until we get solid signs of inflation not being entrenched, mortgage rates will likely remain high. According to Bill McBride from Calculated Risk,

“My current view is inflation will ease quicker than the Fed currently expects.”

If inflation does slow much quicker than expected, we will likely see the ‘soft landing’ the Federal Reserve was talking about. However, just because inflation does slow quicker does not mean it will go to the 2% target. If inflation does not come down to their desired level, rates will likely stay higher. However, there is a positive sign of inflation cooling and mortgage rates may have peaked.