Buying a home is an exciting milestone in life. But fluctuating interest rates can make it challenging to know when to take the plunge. Lately, there’s been lots of buzz about mortgage rates decreasing. So what’s the real deal? Let’s dig into the data and predictions to find out if interest rates for houses are going down.
Current Trends Show Dropping Mortgage Rates
Mortgage rates have been dropping steadily since November 2018 when the 30-year fixed rate hit a peak of 4.94%. As of December 2022, the average 30-year fixed mortgage rate has fallen to around 6.33% according to Freddie Mac.
That’s a significant decrease from the 2022 high of 7.08% in early November. While 6.33% is still higher than the all-time lows of under 3% in 2020 and 2021, the downward trend provides a glimmer of hope for homebuyers.
In particular, the gap between fixed and adjustable rate mortgages (ARMs) has narrowed. The average 5/1 ARM rate now sits at 5.52%, much closer to fixed rates than earlier in 2022 when they diverged by over 2 percentage points. This dynamic gives buyers more options to find affordable monthly payments.
The dip in mortgage rates coincides with slowing home price growth and reduced buyer competition. With housing affordability stretched thin in 2022, demand has cooled and sellers are more willing to negotiate. This combination of factors seems to indicate the housing market is rebalancing in favor of buyers hoping to score deals.
Historical Data Shows Volatility is Normal
While the current rate drop brings relief, historical mortgage rate data reveals volatility is par for the course. Looking back over the past decade, 30-year fixed mortgage rates have swung between 3-5% during normal economic conditions.
When COVID-19 hit in 2020, the Fed slashed rates to near zero, driving mortgage rates down to unprecedented lows. But as the economy rebounds, interest rates are climbing back up to pre-pandemic levels.
The housing market has endured its share of uncertainty throughout history as well. For example, rates topped 18% in the early 1980s before dropping below 10% later that decade. More recently, the 2008 financial crisis sent rates up to around 6%, before they descended again in 2009 and onward.
The takeaway is that interest rate fluctuations are normal, especially during times of economic uncertainty. Savvy homebuyers take the ups and downs in stride, focusing on finding the best rate available when they are ready to buy.
Forecasting Models Suggest Continued Volatility
While further rate decreases could occur, expert forecasts warn the bottom may not be here yet. The Mortgage Bankers Association, National Association of Realtors, and Freddie Mac all predict rates will rise again in 2023 as the Fed continues its inflation-fighting mission.
Their outlooks account for various market indicators like inflation reports, employment numbers, consumer spending, and inventory levels. The consensus estimate pegs 30-year fixed mortgage rates rising back up to around 7% by the end of 2023.
At the same time, groups like Fannie Mae foresee rates leveling off in the second half of 2023. Their prediction mirrors historical patterns of rates stabilizing after a period of volatility.
The reality is that interest rates are incredibly complex and depend on national and global economic forces. As the HousingWire team notes, “the mortgage rate environment still has some pain ahead before we get back to normal.”
Patience and flexibility will be key for navigating the unpredictable rate environment in 2023. Working with a knowledgeable lender can help buyers take advantage of dips when timing the market.
How Do Mortgage Rates Influence the Housing Market?
Mortgage rates directly impact housing affordability and buyer purchasing power. Lower rates make monthly payments more manageable, expanding the budget for home shoppers.
Conversely, higher mortgage rates decrease affordability. A 1% rate increase could tack on over $100 to the typical monthly mortgage payment. For buyers stretched financially, that forces tough decisions around sacrificing space or location to stay on budget.
In that way, declining interest rates often stimulate housing demand as more buyers can qualify for loans. Lower monthly payments also allow people to afford higher priced homes. At the same time, seller expectations adjust downward when rates rise quickly, bringing list prices back down to earth.
On the flip side, rapidly rising interest rates tend to dampen the market. Buyers get priced out or reluctant to purchase when mortgage payments shoot up. Properties linger longer on the market and sellers are forced to drop prices to attract activity.
This push and pull dynamic between rates and home prices contributes to housing market cycles. As the Realtor.com economists explain, “changes in interest rates represent a significant shift in housing affordability and buying power.” Monitoring rate trends provides key insights into current and future housing market conditions.
Should You Buy Now or Wait it Out?
With mortgage rates expected to keep fluctuating in 2023, you may be wondering if you should buy now or wait it out. Here are a few factors to consider:
Your financial situation - Make sure you are financially ready by examining your income, savings, debts, and credit score. Having your finances in order will equip you to act when the time is right.
Prices vs. rates - Do the math to see trade-offs between home prices and interest rates in your local market. In some areas, lower prices may offset higher rates.
Fixed vs. adjustable rates - Weigh the pros and cons of rate security with fixed mortgages versus potentially lower payments with ARMs. Factor in your plans to live in the home long-term.
Timing needs - Don’t try to time the housing market perfectly. Focus on your needs and goals. If you need to move soon for a new job or growing family, buying when rates are reasonable for your budget may make sense.
Expert guidance - Talk to a trusted lender or real estate agent to understand the nuances in your local area. They can explain all your mortgage and purchase options so you can make an informed decision.
Patience - With interest rates in flux, having patience and perseverance is key to landing the right home loan. Be ready to act when the stars align for your situation.
The Bottom Line
While rising interest rates in 2022 dealt a blow to housing affordability, the recent cooling indicates rates could be turning a corner. As the Realtor.com team puts it, “the sharp rise in rates has slammed the brakes on the housing market.”
For prospective homebuyers, don’t let volatile rates deter you from the dream of homeownership. Stay nimble and work with professionals to find competitive mortgage rates and pricing. Monitor the data and forecasts, but focus on your personal financial picture. With persistence through ever-changing markets, you can still secure a great rate and home.
The journey may take unexpected turns, but with the right preparation, you’ll be equipped to find the optimal loan when interest rates align with your home buying goals.