Last year, one factor drove the real estate market more than any other: rising mortgage rates.
In March 2022, the Federal Reserve began a series of interest rate hikes in an effort to pump the brakes on inflation. And while some market sectors have been slow to respond, the housing market has reacted accordingly.
Both demand and price appreciation have tapered, as the primary challenge for homebuyers has shifted from availability to affordability. And although this higher-mortgage-rate environment has been a painful adjustment for many buyers and sellers, it should ultimately lead to a more stable and balanced real estate market.
So what can we expect in 2023? Will mortgage rates continue to climb? Could home prices come crashing down? While this is one of the more challenging real estate periods to forecast, here’s what several industry experts predict will happen to the U.S. housing market in the coming year.
Mortgage Rates Will Fluctuate Less
In 2022, 30-year fixed mortgage rates surged from roughly 3% in January to around 7%. According to Rick Sharga of real estate data company ATTOM, “We’ve never seen rates double in so short a period."
This year, economists forecast a less dramatic shift.
In an interview with Bankrate, Nadia Evangelou, senior economist for the National Association of Realtors, shares her vision of three possible mortgage rate scenarios:
- Inflation continues to surge, forcing the Fed to repeatedly raise interest rates. In that scenario, she predicts that rates could reach as high as 8.5%.
- Inflation decelerates, and mortgage rates follow suit, averaging 7 to 7.5% for the year.
- Rising interest rates trigger a recession, which could ultimately lead mortgage rates to drop closer to 5% by the end of the year.
Economists at Fannie Mae fall somewhere in the middle. In a recent press release, they predicted that the U.S. economy will experience a “modest recession” this year. But in their December Housing Forecast, they project that 30-year fixed mortgage rates will only fall by half a point from an average of 6.5% in Q1 to 6.0% in Q4.
“From our perspective, the good news is that demographics remain favorable for housing, so the sector appears well-positioned to help lead the economy out of what we expect will be a brief recession,” said Fannie Mae Chief Economist Doug Duncan.
What does it mean for you? Even the experts can’t say for certain where mortgage rates are headed. Instead of trying to ”time the market,” focus instead on buying or selling a home when the time is right for you. There are a variety of mortgage options available that can make a home purchase more affordable, including adjustable rates, points, and buydowns—and keep in mind you can always refinance down the road. We’d be happy to refer you to a trusted mortgage professional who can outline your best options.
