Mortgage rates expected to fall to 5.4% by late 2023, banking group projects

By Anna Bahney, CNN Business

After more than doubling this year, mortgage rates are expected to retreat in 2023, according to an updated forecast from the Mortgage Bankers Association.

MBA’s economists also said they expect the US to enter into a recession in the first part of next year that will be driven by tighter financial conditions, reduced business investment and slower growth globally. That will, in turn, push the unemployment rate up from its current 3.5% to 5.5% by the end of next year, according to the forecast.

“Next year will be particularly challenging for the US and global economies,” said Mike Fratantoni, chief economist and senior vice president for research and industry technology. “The sharp increase in interest rates this year — a consequence of the Federal Reserve’s efforts to slow inflation, will lead to an equally sharp slowdown in the economy, matching the downturn that is happening right now in the housing market.”

But the upshot for homebuyers is that mortgage rates are expected to come down next year, Fratantoni said. MBA is forecasting mortgage rates to end 2023 at around 5.4%. The average rate for a 30-year fixed rate mortgage is currently 6.94%, according to Freddie Mac.

Fratantoni cautioned that mortgage rates will still face plenty of volatility in the coming months as the Fed is expected to continue to raise interest rates this year.

Ultimately, the Fed’s ongoing efforts to tame inflation will slow homebuyer demand for mortgages in 2023, according to the forecast.

Mortgage origination volume is expected to decline to $2.05 trillion in 2023 from the $2.26 trillion expected in 2022, according to MBA. The forecast calls for purchase mortgages to drop by 3% next year, while refinance volume is anticipated to decline by 24%.

The slowdown in housing activity and higher mortgage rates will cut the pace of home price growth, according to MBA. The forecast projects national home prices to be roughly flat in 2023 and 2024.

“This will allow household incomes some much-needed time to catch up to elevated property values,” said Joel Kan, vice president, deputy chief economist at MBA. “However, many local markets will see home price declines, even if national price measures remain largely unchanged.”

Kan said first-time homebuyers will account for a large portion of housing demand over the next few years. But since more homeowners are staying put, unwilling to give up their ultra low mortgage rates, it means fewer starter homes are available. And the combination of low inventory of homes for sale and slowing new construction activity means that housing supply is likely to remain constrained.

As broader unemployment levels rise during a recession, mortgage delinquencies, which are currently at low levels, will also rise, MBA projected.

“The national mortgage delinquency rate reached a record low in the second quarter of 2022, but will likely increase with the uptick in unemployment and the destruction caused by Hurricane Ian in Florida, South Carolina, and other nearby states,” said Marina Walsh, vice president of industry analysis.

She also said that amid this slowdown, the mortgage industry will take a hit.

“Origination volumes have declined, revenues have dropped, and expenses continue to rise,” said Walsh. “Lenders have started to shrink excess capacity by reducing staffing levels, exiting less profitable channels or exiting the business entirely.”

MBA estimates that a 25% to 30% decrease in mortgage industry employment from peak to trough will need to occur, given the decrease in production volume from the record levels in 2020 and 2021.

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