After home financing costs nearly doubled in 2022, some relief is in sight for potential homebuyers in 2023.
The interest rate for a 30-year fixed-rate mortgage in the U.S. is expected to drop to 5.25% by the end of this year, according to a forecast by the financial services website Bankrate. That's 1.49 percentage points lower than the current rate, and nearly two percentage points lower than 2022's peak rate of 7.12%.
A slowing economy could lead to lower mortgage rates
The forecast reflects expectations of a slowing economy in 2023 as the Federal Reserve continues to increase its benchmark interest rate to combat high inflation.
While the Fed has made progress reducing inflation — from a year-over-year peak of 9.1% in June to 7.1% as of December — it's still nowhere near the Fed's target rate of 2%. For that reason, Fed officials expect rate hikes to continue in early 2023, according to Bankrate.
While rate hikes can reduce inflation by making it more expensive to borrow money, they also discourage investment. This can shrink the economy, and perhaps trigger a recession in which many people lose their jobs.
And since mortgage interest rates are largely influenced by the overall state of the economy, they typically decrease during a recession.
"With the Fed maintaining an aggressive posture and inflation still high, mortgage rates will roller coaster up and down during the first half of the year before a more substantive slide takes hold in the back half of 2023," says Greg McBride, chief financial analyst at Bankrate, who predicts a "notable pullback" on mortgage rates as inflation trends lower.
A drop in mortgage rates would be positive news for potential homebuyers, as it will reduce their monthly homeownership costs.
However, the projected dip in mortgage rates won't be anything like pre-pandemic lows, and a chronic undersupply of homes will keep prices high, so many potential homeowners will remain on the "sidelines" in 2023, says McBride.
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