High mortgage rates are bad. They reduce affordability, lead to fewer home sales, and can cause lots of industry-related job losses.
The year 2022 has probably been the worst on record as far as mortgage rates go, with the 30-year fixed climbing from sub-3% levels to over 7%.
This single-handedly shocked the housing market, leading to big price reductions, thousands of mortgage layoffs and related closures, and a quick shift from a seller’s market to a buyer’s market.
But there could be a silver lining to a near tripling of mortgage rates in the span of less than a year.
And that’s if and when they begin to really improve, they’ll feel a lot lower than they actually are.
Your Brain Will Soon Think a 5% Mortgage Rate Is Pretty Good
It’s human nature. Once you’ve experienced worse, anything better will feel a lot better, even if it’s still worse than before.
I think it’s safe to say that we won’t see a 3% 30-year fixed mortgage rate being offered anytime soon.
Those days have come and gone. However, recent developments have pointed to the potential for substantially lower mortgage rates.
While there’s been a lot of pain in 2022, the 30-year fixed has enjoyed nearly a month of declines lately.
It all got started back on November 10th, when the CPI report showed a big deceleration in inflation.
This was the report the mortgage industry was hoping for, as mortgage rates just surpassed 7%.
Had the report been ugly, we could have seen rates move to 7.5% and eventually 8%, depending on how things played out.
But the good news some economists had expected delivered, just in the nick of time.
Since then, the 30-year fixed has trickled lower and lower and now sits around 6.25% for a vanilla scenario.
This is nearly 1% point lower than it was about a month ago, which is equally groundbreaking in terms of speed of rate change.
Fortunately, this time mortgage rates went down as opposed to up in record fashion.
For anyone in the market to buy a home, this is not only a godsend financially but also a huge psychological victory.
Aside from actually getting a cheaper mortgage, it’ll just feel a lot better to snag a rate of 6.25% versus 7.25%.
And for some, it may mean the difference between a mortgage approval and a declined loan file.
Are Mortgage Rates Finally Trending Lower?
Since the beginning of 2022, the trend has not been our friend with respect to mortgage rates.
The popular 30-year fixed mortgage started the year at 3.22%, and steadily increased to 7.08% in late October, with only a few week-to-week improvements sprinkled in.
This meant mortgage rates were clearly trending higher with zero debate from just about anyone.
But is it possible that we can now say with some confidence that mortgage rates are trending lower?
I track mortgage rates using the Freddie Mac data and include a blurb about which way they’re trending, which is partially math and the rest gut feeling.
While I don’t want to get overly optimistic here, part of me does want to flip the switch to trending LOWER.
After all, rates have now fallen three weeks in a row, and Fed chair Powell indicated a moderation in rate hikes, with a 50-basis point hike expected this month.
That’s less than the four 75-basis point hikes seen previously this year, and perhaps a sign of a softening stance from the Fed.
And if the good news keeps flowing with regard to inflation, mortgage rates could see even more substantial declines.
The timing would certainly make sense, as mortgage rates tend to be lowest in the month of December.
Cautious Optimism for Mortgage Rates
Before I get too excited, I want to see more data. I want to see consecutive reports that show a meaningful decline in inflation.
And the Fed wants to see that too, which is why they plan to continue raising their fed funds rate, even if inflation wanes.
Ultimately, the Fed has to stay the course, and will continue raising rates through at least early 2023.
Similarly, mortgage lenders aren’t going to go out of their way to lower mortgage rates by a tremendous amount due to one or even two positive developments.
But if we do see more evidence that inflation is becoming less of an issue, there is a lot of room for mortgage rates to move lower.
Just consider the spread between the 10-year bond yield and 30-year mortgage rates.
Historically, it has been under 2%, but it’s currently close to 3% with the 10-year bond yield pricing at 3.55% and the 30-year fixed around 6.50%.
So yes, the argument for sub-5% mortgage rates by 2023 is alive and well. And the high mortgage rates we experienced lately will make a 4.75% mortgage rate look really, really good.