If cash is king in the housing market, then monthly payment is king.
Ultimately, borrowers can only pull the trigger on a particular home if the monthly mortgage payment is less than a given lender’s maximum debt-to-income ratio. If home prices and mortgage rates rise too quickly, potential buyers may lose their eligibility altogether.
It’s not just a guess, that’s exactly what happened millions of potential buyers over the past year.
According to the Federal Reserve Bank of Atlanta, the pandemic has coincided with a historic deterioration in housing affordability. It is the result of mortgage rates rising from 3% to over 6% in 2022 just after US home prices soared 41% during the pandemic real estate boom.
In fact, housing affordability as measured by the Atlanta Fed in December 2022 was worse than at any time before the 2008 housing bubble (see chart below).
This fast deterioration in housing affordability has forced many buyers and sellers to suspend their efforts. He also has spurred house price corrections in many Southern and Western housing markets.
How can housing affordability be improved in the future? There are really only three levers that can help here: higher incomes, lower house prices or lower mortgage rates.
But truth be told, the lever that is most likely to make a difference is mortgage rates. Unlike house prices, which have always been reluctant to fall,mortgage rates are volatile and can drop quickly if finances markets were to loosen. And unlike incomes, which could dip in a recession, mortgage rates would likely fall if the Fed’s inflation fight does indeed cause a recession.
Where Do Mortgage Rates Go From Here? For clues, Fortune once again tracked mortgage rate forecasts from nine leading research firms (Fortune did a similar roundup for house price predictions in 2023). Remember that in times of inflation, it is difficult to predict future mortgage rates.
Bank of America: Investment bank researchers expect mortgage rates to fall to 5.25% by the end of 2023. “Mortgage rates have likely peaked in 2022 and the historically high 30-year mortgage rates and 10-year Treasury yield spread may narrow by up to in 2023. Our structured products team expects the 30-year mortgage rate to decline. to around 5.25% in 2023 as spreads normalize with lower Treasuries volatility,” the BofA researchers wrote in January.
THE Mortgage Bankers Association: The DC-based trade group expects the 30-year fixed mortgage rate to slowly decline this year. The group expects mortgage rates to average 6.4% in Q1 2023, 6.1% in Q2 2023, 5.7% in Q3 2023 and 5.3% in Q4 2023. Beyond this year, the group expects mortgage rates to end 2024 at 4.6% and end 2025 at 4.4%.
Windermere Real Estate: The leading real estate company based in Seattle expects the 30-year fixed mortgage rate to decline throughout the year. The company expects mortgage rates to average 6.4% in the first quarter of 2023, 6.1% in the second quarter of 2023, 6.0% in the third quarter of 2023 and 5.6% in the fourth quarter of 2023.
Fannie Mae: Economists at Fannie Maewhich was approved by the US Congress in 1938 to provide affordable mortgage financing, predict that the 30-year fixed mortgage rate will average 6.5% in 2023 and 5.9% in 2024.
Freddie Mac: Economists at Freddie Mac, which, like Fannie Mae, has also been licensed to provide affordable mortgage financingexpects the 30-year fixed mortgage rate to average 6.4% in 2023.
Moody’s Analytics: The financial intelligence arm of Moody’s forecasts that the 30-year fixed mortgage rate will average 6.5% for most of 2023. (You can find the regional and national home price outlook from Moody’s Analytics here.)
Goldman Sachs: The investment bank expects the 30-year fixed mortgage rate to end in 2023 at 6.5%. “We expect 30-year fixed mortgage rates to reach 6.5% by the end of the year, reflecting tighter mortgage spreads due to the rebound in the MBS market – particularly for securitisations with explicit or implicit government guarantees – but higher Treasury yields.We also note that the rapid decline in mortgage origination, particularly refinances, has caused some lenders to withdraw or reduce lending.This has the potential to allow remaining lenders to increase their margins by pushing mortgage rates higher,” wrote Goldman Sachs researchers on January 23. (You can find the latest home price forecasts from Goldman Sachs here).
Realtor.com: Real estate listing site economists believe the 30-year fixed mortgage rate will average 7.4% in 2023.