Mortgage industry watchers have started 2023 with optimism regarding the possibility of mortgage rates returning to the 5% range this year – but not without a dose of volatility on the way.
“The mortgage market began 2023 on a positive note, with a decline in mortgage rates leading to an uptick in refinance applications. Purchase activity was down again on a weekly and annual basis,” Bob Broeksmit, Mortgage Bankers Association (MBA) president and CEO, said in a statement.
Broeksmit said the trade group expects mortgage rates to move lower over the course of the year, which should bring more homebuyers back into the market. MBA’s latest forecast is for the 30-year rate to reach 5.2% at the end of 2023.
The optimism is based on the fact that the Federal Reserve’s restrictive monetary policy has started to cool down the economy.
Despite the labor market finishing 2022 stronger than expected, job and wage growth are slowing, per the Bureau of Labor Statistics (BLS).
Meanwhile, the Consumer Price Index rose by 6.5% last month compared to one year ago — the smallest 12-month increase since October 2021. In turn, inflation slowed in December for the sixth straight month.
Consequently, the 30-year fixed-rate mortgage declined to 6.33% this week, according to Freddie Mac, down 15 basis points compared to the previous week. The same rate was 3.45% one year ago at this time.
At Mortgage News Daily, rates were 6.15% on Thursday morning, down six basis points.
“While mortgage rates have resumed their decline, the market remains hypersensitive to rate movements, with purchase demand experiencing large swings relative to small changes in rates,” Sam Khater, Freddie Mac’s chief economist, said in a statement.
“Over the last few weeks, latent demand has been on display with buyers jumping in and out of the market as rates move,” Khater added.
Where are rates heading to?
Mortgage rates have been moving up and down in the 6% to 7% range since September, when rates crossed the 6% threshold for the first time in 14 years.
And, according to George Ratiu, Realtor.com manager of economic research, they will remain in the same range over the short term.
“Mortgage rates have mirrored the volatility in the 10-year Treasury as investors wrangle mixed expectations amid an inflow of new economic numbers,” Ratiu said. “With capital market volatility expected to continue, mortgage rates will maintain a seesaw trajectory over the short term, likely staying within the 6% – 7% range.”
Tad Dahlke, who runs the California-based mortgage trading business RAMS, wrote in commentary to clients that the average mortgage rate has been 7.38% in the past 40 years, 4.53% over 20 years, and 3.36% in the last three years.
Meanwhile, the primary mortgage spreads – the difference between the mortgage rates for borrowers and the yield on mortgage-backed securities – which is at 200 basis points. It has averaged between 75 to 80 bps in the past 10 years.
“If the yields on the 10-year Treasury note remain in and around 4%, and spreads revert towards the 10-year average, then mortgage rates should drop into the 5% range,” Dahlke said.
The 10-year Treasury note yield was at 3.54% on Wednesday, down from 3.79% one week earlier.
