Mortgage rates fell sharply this week, dropping to their lowest level since June. The average 30-year fixed mortgage rate declined to 6.67% as of December 21, according to Freddie Mac’s weekly survey. This marks the eighth consecutive week that rates have declined.
Rates Fall to Pre-Summer Levels
The dip in rates has brought borrowing costs down to levels not seen since early summer. Rates are now almost 2 full percentage points below their peak of nearly 9% in October and November. This plunge reflects improving inflation data and expectations that the Federal Reserve will slow its pace of interest rate hikes.
While 6.67% is still quite high from a historical perspective, the rapid decline in recent weeks has significantly improved housing affordability. This has drawn some buyers back into the market after months of weak demand. However, home prices remain elevated and the housing market overall is still struggling with low inventory.
Renewed Homebuyer Interest, But Sellers Keep Sidelines
The drop in mortgage rates has sparked a rise in homebuyer interest and demand. Mortgage applications to purchase a home rose 13% last week compared to the previous week. This marks the second straight week of gains after months of declines.
However, seller supply continues to lag behind buyer demand. New listings fell 1% year-over-year last week even as buyer traffic improved. Home prices are still up more than 10% from a year ago as well. This combination of high prices and limited for-sale homes makes it unlikely the market will fully rebalance in the near-term.
|Median Home Price
While lower rates bring hope of a housing turnaround in 2023, significant headwinds remain. Affordability is still strained by high prices and rising recession fears could curb demand once again. Most experts say a broader recovery is more likely to materialize in 2024 versus next year.
Outlook Hazy Despite Rate Plunge
Economists and industry analysts caution that while the plunge in mortgage rates is undoubtedly good news, major housing headwinds persist. Job losses or stalled wage growth tied to a potential recession could undermine demand. And with borrowing costs still historically high, fewer prospective buyers can afford monthly payments.
In addition, the supply-demand imbalance favoring sellers continues to plague the market. Inventory remains low while prices stay elevated. This restricts options for buyers even as rates become cheaper. Until home prices moderate and more homes list for sale, sales activity is expected to stay muted.
Most projections call for only modest improvement next year followed by more meaningful gains in 2024 and 2025 as rates potentially fall below 6% again. But the path back to a normal housing market will likely be long and uneven given increasing economic uncertainty.
Fed Policy Holding Key to Future Rate Moves
Much depends on how aggressive the Federal Reserve remains with interest rate hikes in 2023. Most economists expect the Fed to further slow and eventually halt rate increases over the first half of next year. This would pave the way for steadier mortgage rate declines later in 2023 and into 2024.
Potential Fed Rate Paths
|2023 Rate Hikes
|Year-End 2023 Fed Funds Rate
|30-Year Fixed Mortgage Rate
If inflation keeps trending down, the Fed may stop hiking rates sooner than expected. This would likely translate into the 30-year fixed mortgage dipping below 6% by early 2024 and potentially nearing 5% later next year. However, any inflation reacceleration could lead to more aggressive Fed tightening and keep rates elevated for longer.
Buyer Psychology Still Fragile Despite Cheaper Rates
Another major wild card is homebuyer psychology and how would-be purchasers respond to lower rates. So far, demand has perked up only modestly as borrowers remain cautious. Memories of 6-7% rates being considered historically cheap last year versus 13-15% in prior decades have eroded buyer appetite and confidence.
Households may still sit on the sidelines until rates fall below 6% and more certainty emerges around the economic outlook. This lingering hesitancy would mute the positive impact of lower rates. On the other hand, buyer activity could ramp up sharply if confidence improves as rates near 5-6% again.
In essence, still-high absolute rates combined with recession fears have scarred buyer psyches to an extent. It may require sustained periods with rates below 6%, solid job figures, and minimal inflation for confidence to fully heal. Until then, the mortgage rate rollercoaster ride may continue to induce buyer whiplash.
In summary, this week’s plunge in mortgage rates to mid-June lows marks an encouraging sign for the battered housing sector. However, significant challenges around affordability and inventory persist. And with the economy at an inflection point, the housing recovery timeline remains uncertain. Sustained healing will likely require the better part of 2023 alongside further rate declines. But lower rates so far represent a step in the right direction.
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