- The Mortgage Bankers Association forecasts mortgage rates will fall to 5.2% from above 6% in 2023.
- The prediction rests on a drop in the 10-year Treasury-bond yield, which influences mortgage rates.
- An economist with the group said lower rates would help buyers but that owners may not want to sell.
Of all the factors influencing the housing market, there is perhaps no component more important than mortgage interest rates.
Seesawing 30-year mortgage rates — which fell to as low as 2.65% in 2021 and climbed to as high as 7.08% last year — have determined the trajectory of the US housing market over the past three years.
While the long-term rates were back on the rise in February at 6.32%, the Mortgage Bankers Association — the largest trade association for mortgage bankers — is forecasting a drop to 5.2% by the end of 2023 and 4.4% in 2024.
Part of the reason is that US economic growth should slow as a result of tighter Federal Reserve monetary policy, which would send investors to the safety of government bonds, Joel Kan, the deputy chief economist at the association, said. That demand tends to boost bond prices and lower the yields.
Simply put: If 10-year yields for Treasury bonds — a government-backed debt security that's issued by the US Treasury — decline to 3% in 2023 from levels above 3.75%, as the Mortgage Bankers Association projected, mortgage rates are likely to retreat as well.
For a few weeks, it looked like mortgage rates were well on their way to sub-6% levels. A drop in Treasury yields on the back of easing inflation data in January pushed 30-year-mortgage rates to as low as 6.09%, about a full percentage point off November highs. The rate move resulted in an unexpected boost in homebuying activity.
Conversely, Treasury yields have spiked by 0.45 percentage points this month after a stronger-than-expected January employment report and when data showed stubbornly high consumer price inflation. The economic resilience pushed mortgages rates higher, Freddie Mac Chief Economist Sam Khater said in a release of this week's rate survey.
Despite the whipsawing rates, the Mortgage Bankers Association is sticking to its forecasts, Kan said.
A drop in Treasury yields also tends to reduce market volatility, encouraging investor purchases of mortgage-backed securities at a time when the Fed has reduced its support of that sector, Kan said.
As the Fed pulled back on mortgage-bond purchases last year, that caused the yields on the 30-year mortgages linked to those bonds to rise relative to the 10-year Treasury yield, Kan said. So as investors move back into mortgage-backed securities, that should help narrow the spread between those yields and Treasurys, which would result in lower mortgage rates, he said.
Lower mortgage rates don't mean more home sales
But even if mortgage rates do retreat to 5.2%, Kan does not foresee housing demand returning to the levels seen during the early stages of the pandemic, a time when rock-bottom interest rates brought about an unprecedented homebuying frenzy in the US.
"We are expecting things to pick up in the second half of this year but not anywhere as strong as what we saw in 2020 and 2021," Kan said. "Those were really massive years for the housing market."
Kan's projection lies in the fact that higher mortgage rates have added hundreds of dollars to the monthly housing costs for a homeowner taking out a new loan, which creates a rate-lock effect in the real-estate market. With fewer Americans willing to move, the available supply is constrained, and home prices are likely to remain high, he said. Home sales and new-home construction will likely remain low, he added.
"Activity is also going to depend on current homeowners," Kan said. "A lot of people that bought or refinanced in 2020 and 2021 have 3% mortgage rates. If rates are around 6%, a lot of these owners don't really have an incentive to get rid of that current mortgage — they are going to hold on to that house."