What’s Going on With Mortgage Rates in 2023?

A 'For Sale' sign hangs in front of a home in Miami, Fla., on June 21, 2022. (Joe Raedle/Getty Images)

With the 2022 mortgage rate peaking at 7.12 percent and inflation at 6.5 percent by the end of December 2022, it was a tumultuous economic year.

The hot housing market slowed down in many markets primarily due to high mortgage rates. But what will 2023 bring for mortgage rates? Is there relief on the way?

Inflation Contributes to Mortgage Rates

The Federal Reserve sets a target interest rate assessed on the bank-to-bank level. This is the rate banks charge each other for loans or borrowed money. This charge is passed on to the consumer.

The goal is to limit monies that can be borrowed so that a hot economy can cool down. The goal inflation rate is 2 percent. But in 2022, the average inflation rate was 8.3. This pushed up the average mortgage rate to 4.87. In contrast, the average inflation rate in 2020 was 1.2 and the average mortgage rate was 3.11.

Mortgage rates ended up having a record-breaking 2022. Mortgage rates rose by a higher margin than any other year on record.

This is a good time for savers, but not for borrowers.

10-Year Treasury Securities Yield Indicates Mortgage Rates

There’s a correlation between 10-year Treasury securities and mortgage rates. It’s called the “spread.” That’s the gap between the 10-year Treasury yield and the 30-year mortgage rates.

The spread in normal times should be between 1.5 percent and 2 percent. For example, if the 10-year Treasury yield is 2 percent, the mortgage rate is 4 percent. So, the 10-year Treasury yield indicates the mortgage rate.

On Feb. 22, 2022, the Fannie May 30-year mortgage rate was 3.47862 percent, and the Treasury yield was 1.94 percent. The mortgage rate was low, and the Treasury yield was low.

But on Feb. 21, 2023, the Fannie May 30-year mortgage rate was 6.11308 percent, and the Treasury yield was 3.95 percent. So now we have a high mortgage rate and a high Treasury yield. As the 10-year Treasury securities rise, so do mortgage rates.

Looming Debt Ceiling Limit Can Push Mortgage Rates Up

The debt ceiling hit its limit on Jan. 19, 2023. This forced the U.S. Treasury to extend it to June 5. The U.S. government can only authorize borrowing up to the amount of the ceiling debt limit unless Congress raises it.

A debt limit standoff could push rates higher. With mortgage rates up, it might dampen a cool housing market even further.

Slower Economy Brings Mortgage Rates Down

A slower economy brings mortgage rates down. But at what cost?

The World Bank predicts a worldwide recession in 2023, noting that global growth has perilously slowed down. They attribute this to monetary policies from central banks worldwide. By trying to tame inflation, countries have worsened the global financial condition. This has brought down economic activity, such as loaning money.

It anticipates a U.S. growth rate of 0.5 percent, down from an earlier projection of 2.4 percent.

This will decrease interest rates since loan demands will decrease, and investors will seek other safer avenues.

But although the prediction by the World Bank is a recession, there are no guarantees of anything. From a mortgage-rate perspective, there are a few mixed messages.

Mixed Messages Regarding Future Mortgage Rates

Fannie Mae anticipates a flat 6 percent year-end 30-year fixed mortgage rate. In contrast, Freddie Mac is looking to an annualized rate of 6.4 percent in 2023.

The Mortgage Bankers Association anticipates a year-end mortgage rate of 5.2 percent. But Realtor.com isn’t as optimistic. Instead, it projects a 7.1 percent interest rate by the end of 2023.

Inflation Decrease in January 2023

The theory behind stabilizing mortgage interest rates is that inflation has peaked and will be on the downturn. The inflation rate fell 0.7 points to 5.3 percent in January 2023. Whether it continues to decrease is the question.

With the possibility of inflation slowing down, lower mortgage rates may be on the horizon. But, although interest rates may go down, lenders may still be nervous and pull back. This could add to a credit crunch.

Will Home Prices Collapse?

Whether home prices collapse depends on whether the Federal Reserve can maneuver a soft landing with inflation. Home prices could hold their own as long as there isn’t a recession.

For example, mortgage rates rose rapidly in the late 1970s and early 1980s. And although home price appreciation slowed down, growth remained positive. But once the recession hit, home prices fell.

And because current homeowners are holding onto their low fixed-rate mortgages, some areas have a housing shortage. This could help in maintaining home prices.

30-Year Mortgages May Remain High

Unless there’s a slowdown in the economy, there may be little change in mortgage rates. If a recession does happen, as the World Bank predicted, mortgage rates will fall. But whether credit loosens up is another factor.

Keep an eye on the 10-year Treasury securities. They will indicate when a change in rates is coming.

The Epoch Times Copyright © 2022 The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.