Mortgage Rates Set to Ease, But Not to Pre-2022 Levels

Mortgage Rates Set to Plateau Around 6% - But When Will They Fall?

After breaching 7% this fall, soaring mortgage rates now appear poised to peak in coming weeks according to Mark Zandi, chief economist at Moody’s Analytics. But homeowners awaiting relief may need patience as rates could hold around 6% for much of 2023.

“I think mortgage rates probably settle somewhere around five and a half to six percent,” said Zandi about where rates head next in an interview with CNBC on Monday. This projection marks a downgrade from his previous call for mortgage rates to top out around 7.5%.

What’s behind the adjustment and when could rates finally recede?

The key driver remains the Federal Reserve’s ongoing mission to crush high inflation. After rapidly ripping off four straight 0.75 percentage point rate hikes, the Fed is expected to shift to a smaller 0.5 point increase at its December meeting.

That tentative step towards the Fed finishing its rate march underpins Zandi’s outlook. As the Fed potentially slows its fierce inflation-fighting stance, longer-term rates like mortgage rates may ease as well.

However, Zandi stressed that the Fed’s benchmark rate still needs to surpass 5% to sufficiently cool price increases. This means even once they peak, mortgage rates are likely locked in around 6% for much of 2023 rather than falling rapidly.

What does this extended 6% rate plateau mean for the housing market? Some temporary relief from crushing affordability issues that have pushed home sales down for eight straight months.

On a $300,000 mortgage, monthly payments at 6% shake out around $1,800 - a tough pill but more palatable than the $2,300 monthly nut required at a 7.5% rate. First-time buyers in particular may look to take advantage while rates hover slightly lower.

But Zandi still does not anticipate a major rebound in home sales next year as rates remain well above 2021 levels. Any boost will hinge on incomes rising enough to offset higher interest costs - an uncertain bet with the economy potentially slowing.

The big question then becomes - when could mortgage rates definitively trend lower again? That relies on clear evidence core inflation is controlled to the Fed’s 2% target. And on that timeline, Zandi hesitates.

“By this time next year, maybe mortgage rates start to fall,” he conceded. “But that’s a guess, there are no guarantees here.”

So while mortgage rates appear set to ease slightly from current highs, homeowners banking on a return to the record-low rates of 2020 may need to keep dreaming for some time yet. With the Fed’s inflation fight ongoing, 5%+ mortgage rates look entrenched for the next year at minimum - pinching housing affordability until price stability makes a decisive comeback.

The bottom line – don’t hold your breath for a sharp drop in mortgage rates during 2023. Mark Zandi stresses it will still be a challenging year across the housing sector. But a plateau around 6% offers a reasonable reprieve for those still aiming to buy or refinance a home in coming months.