Mortgage rates are unpredictable. They are determined by a number of economic factors that are hard to pin down and which move the rate up and down from day to day. That’s to say that no one can give you 100% certainty on the future of mortgage rates. What I believe we can do, however, is look at factors such as inflation and the bond market, keep an eye out for changes, and make an educated guess as to what those changes might mean for mortgage interest rates in 2023.

What Effects Mortgages

What exactly moves the nation’s mortgage rates up or down? The primary factor to consider is the mortgage bond market. These bonds are made up of packaged mortgages from real estate holdings or real properties. These investments are generally more stable or safer because they’re secured by homes. However, if investors believe that the return on a mortgage bond is too low or that they’ve become riskier, those rates rise to compensate. This demand (or lack thereof) can change the rate for everyday people looking at home financing options.

Inflation is the arch-enemy of fixed investments like mortgage bonds because it erodes the buying power of a bond’s fixed rate of return, causing investors to put upward pressure on mortgage rates to compensate. We saw a lot of this happening last year.

I also want to talk very briefly about one of the most confusing pieces and most common questions I hear when it comes to mortgage rates. That is, “what is the difference between the prime rate the Fed controls and mortgage rates?”

Most people think that the Fed controls mortgage rates, but the fact is that they do not. Mortgage rates control mortgage rates, and the Fed controls the prime rate, which is used as a basis to set rates for different types of loans, credit cards and lines of credit. That can indirectly affect mortgage interest rates, as we’ve seen with the Fed raising prime rates aggressively in 2022, but the core issue behind the recent spikes has been inflation.

What Trends Can Inflation Show Us

Inflation went from under 2% to up in the 9.5% range in the early fall of last year. Almost in lockstep, we saw mortgage interest rates hover at 3% during the start of last year to around 8% in some scenarios by October. Recent Consumer Pricing Index (CPI) reports show that inflation had begun to drop, and drop meaningfully, in November, December and January.

Again, correspondingly, we’ve seen mortgage rates come down nicely. They moved from 7.5% to around 6.5% at the beginning of February. They’ll likely be touching 6.25% from many excellent scenarios. This is really great news, especially when looking at the movement of mortgage rates from the last few decades.

Historical Interest Rates

The graph below shows us the average mortgage rate from 1971 until today. This is more than 52 years of data, and in it we can see that the average interest rate has been in the 7.5% range. Let’s make some interest rate comparisons.

Near the right side, in 2020, you can see that the Fed overstimulated the economy by buying billions of dollars of mortgages. That caused rates to drop into the 3% range. They overheated the economy, and I would say that it’s no question they were a year or maybe even a year and a half late in raising the prime rate. This caused a massive jump in inflation, and we saw interest rates going up as they tried to adjust. As of this writing, we’ve had a three-month positive inflation trend. At that same time, we see interest rates going down, again, showing the trend for rates to move with inflation.

Many mortgage brokerages and analysts think we’ll see rates in the 5.5% range in the second half of 2023, and that would be an excellent move lower. In fact, if you look at the 50-year average, rates in the 5% area or even the low 6% range are fantastic compared to the average rate of 7.8%.

The industry has sold many homes in the 5% to 7% range between 2003 and 2006, so we can expect to sell many homes again.

Should Housing Prices And Rates Affect Your Decision?

The bottom line is that if you love a house, you should go get it. Waiting for the “perfect” rate is a non-starter that will keep you thinking about what-ifs. Buying a home with a less-than-ideal rate doesn’t mean much, as you can always refinance later when rates drop – as I believe they will in the next 12 to 24 months. Before then, you can secure the home you truly want with less competition from other buyers. I’ll go as far as to say that you can mark my words that when rates trend down into the 5.5% to 4.5% range, buyers will come back out, put pressure on housing prices, and force them to trend higher.

If you’re still unsure how to make a home purchase work for you in today’s market, I’d love the chance to discuss your situation and if now is a good time for you to buy. Feel free to contact me today.

 

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