Will Mortgage Rates Go Down In 2023?
Mortgage rates are currently a hot topic for many prospective homebuyers. Whether you're a first-time buyer or considering selling your current home to find a better fit for your needs, two questions are likely on your mind:
Are Current Mortgage Rates Considered High?
The 30-year fixed-rate mortgage is significantly influenced by the supply and demand for mortgage-backed securities. Mortgage-backed securities are investment products similar to bonds. They consist of a bundle of home loans and other real estate debt purchased from banks. When investors buy these securities, they are essentially lending money to homebuyers.
The demand for mortgage-backed securities plays a vital role in determining the difference between the 10-Year Treasury Yield and the 30-year fixed mortgage rate. Historically, the average spread between these two rates is 1.72%. However, as of last Friday morning, the mortgage rate stood at 6.85%, creating a spread of 3.2%. This represents an increase of nearly 1.5% above the norm. If the spread were at its historical average, mortgage rates would be 5.37%.
Such a large spread is highly unusual. In fact, the only instances where the spread reached or exceeded 300 basis points were during periods of high inflation or economic volatility, such as the early 1980s or the Great Financial Crisis of 2008-09. The good news is that history shows the spread has always come down after each peak, providing room for improvement in mortgage rates today.
So, what's causing this wider spread and resulting in high mortgage rates?
The demand for mortgage-backed securities is heavily influenced by the risks associated with investing in them. Currently, this risk is impacted by broader market conditions, including concerns about inflation, potential economic downturns, interest rate hikes by the Federal Reserve to combat inflation, negative narratives about home prices in the media, and more.
To put it simply, when the risks associated with mortgage-backed securities are lower, the demand for them increases, leading to lower mortgage rates. Conversely, higher risks lower the demand for mortgage-backed securities, resulting in higher mortgage rates. At present, the demand for these securities is low, leading to high mortgage rates.
When Will Rates Go Back Down?
Odeta Kushi, Deputy Chief Economist at First American, provides insights into this question in a recent blog post. Kushi states: "It's reasonable to assume that the spread and, consequently, mortgage rates will decrease in the second half of the year if the Federal Reserve eases its monetary tightening stance and provides investors with greater certainty. However, it's unlikely that the spread will return to its historical average of 170 basis points, as certain risks are expected to persist." In summary, as investor concerns subside, the spread will shrink. This should result in a moderation of mortgage rates as the year progresses. However, when it comes to forecasting mortgage rates, no one can accurately predict what the future holds.
In conclusion, understanding the factors influencing mortgage rates can provide valuable insights. While current rates may seem high, historical trends suggest room for improvement. As uncertainties ease and investor confidence grows, mortgage rates are expected to follow suit. However, it's important to remember that predicting exact rate movements remains challenging.