The housing market braces itself for higher mortgage rates again – 8 experts see interest rates rising this year

But perhaps those builders and brokers shouldn’t get too excited: Mortgage rates are already rising again.

On Friday, the average interest rate for 30-year fixed-rate mortgages rose again to 6.8%. Rates have risen steadily in recent weeks as financial markets, having seen stronger than expected economic and inflation data, are pricing in a higher chance of the Fed keeping interest rates higher for longer.

That mortgage rate of 6.8% is the highest recorded by Mortgage News Daily since early November. It also means that affordability will deteriorate again.

A borrower who took out a $500,000 mortgage at a fixed rate of 5.99% in early February 2023 would have received a monthly principal and interest payment of $2,995. At an interest rate of 6.8% (ie, the average interest rate on Friday), a borrower would receive a monthly payment of $3,260 on a loan of the same size.

At first glance, a mortgage rate of 6.8% is not unusual historically. However, this underestimates its effectiveness. You see, it’s less about the numeric mortgage rate and more about the total monthly mortgage payment as a percentage of new borrowers’ income. And when you take everything into account (i.e. home prices, income and mortgage rates), says the Federal Reserve Bank of Atlanta, housing affordability is now as bad as it was just before the housing bubble burst in 2007.

The chart below, which shows the year-over-year change in mortgage rates, illustrates how housing affordability has deteriorated so rapidly over the past year.

As long as housing affordability is under this pressure, many real estate economists and analysts believe it will be difficult to sustain a strong recovery in home sales.

Looking ahead, economists say there are three levers that can improve housing affordability: rising incomes, falling home prices and falling mortgage rates.

Of these three levers, mortgage rates can have the greatest impact in the short term. We saw just that as falling mortgage rates translated into slightly improved levels of activity between early November and early February. The opposite could happen in March and April as mortgage rates push further towards 7%.

Where do mortgage rates go from here? To get some hints wealth Mortgage rate forecasts from eight leading research houses again tracked down (wealth did a similar summary for house price forecasts for 2023). Keep in mind that during an inflationary run, it’s difficult to predict future mortgage rates.

The Association of Mortgage Banks: The DC-based trading group thinks the 30-year fixed-rate mortgage rate will be average 5.2% in 2023. Beyond that year, the group expects mortgage rates to average 4.4% in both 2024 and 2025.

Bank of America: Researchers at the investment bank expect falling mortgage rates 5.25% by late 2023. “Mortgage rates are likely to have peaked in 2022, and the historically wide 30-year mortgage rates and 10-year Treasury yields between them could narrow into 2023. Our structured products team expects 30-year mortgage rates to fall to around 5.25% in 2023 as spreads normalize amid lower Treasury volatility,” BofA researchers wrote Jan. 11.

MorganStanley: Morgan Stanley agency MBS strategists expect mortgage rates to fall 6% by the end of 2023. (Here’s the investment bank’s home price outlook.)

Fanny Mae: Economists at Fannie Mae, mandated by US Congress in 1938 to provide affordable mortgage financing, predict the 30-year fixed-rate mortgage rate will be average 6.3% in 2023 and 5.7% in 2024.

Freddie Mac: Economists at Freddie Mac, who like Fannie Mae has also been tasked with providing affordable mortgage financing, predict the 30-year fixed-rate mortgage rate will be average 6.4% in 2023.

Moody’s Analytics: Moody’s Financial Intelligence department forecasts that the 30-year fixed-rate mortgage rate will be average 6.5% through most of 2023. (See Moody’s Analytics regional and national home price outlook here.)

Goldman Sachs: The investment bank predicts that the 30-year fixed-rate mortgage rate will end in 2023 6.5%. “We expect 30-year fixed-rate mortgage rates to rise to 6.5% by year-end, reflecting lower mortgage spreads due to a recovering MBS market – particularly for securitizations with explicit or implicit government guarantees – but higher Treasury reflecting returns. We also note that the rapid decline in mortgage origination, particularly for refinancing, has prompted some lenders to halt or limit lending. This has the potential for remaining lenders to increase their margins by driving up mortgage rates,” Goldman Sachs researchers wrote Jan. 23. (See Goldman Sachs’ latest home price forecast here).

Immobilienmakler.com: The economists at the Home Listing Site believe the 30-year fixed-rate mortgage rate will be average 7.4% in 2023.

Want to stay up to date on the real estate market correction? Follow me on Twitter at @NewsLambert.

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