Have you been following the ups and downs of mortgage rates recently and wondering just how low they might go? With rates climbing over the past year and now appearing to stall out and even decrease slightly, many prospective homebuyers are eagerly anticipating further drops that could provide savings.
But exactly how much could rates fall in the months ahead? And what key factors will determine the trajectory of rates going forward? Let's take a closer look.
Where Mortgage Rates Stand Right Now
Mortgage rates skyrocketed in 2022, with 30-year fixed rates nearly doubling from just over 3% to well over 6% at their peak. This priced many buyers out of the market and led to declining home sales.
Recently though, rates have eased a bit. The average 30-year fixed rate dipped below 6% in January 2023 for the first time in four months. And some lenders were offering rates even lower, in the high 5% range.
So while rates are still quite high historically, the slight downward trend provides some hope that the rapid ascent may be slowing or even reversing course.
The Key Influences on Mortgage Rates
Mortgage rates are primarily impacted by 10-year Treasury yields and the Federal Reserve's actions. As Treasury yields fall, mortgage rates tend to follow. And the Fed directly influences Treasury yields through its benchmark rate hikes and balance sheet reduction policies.
Other factors like inflation and economic growth also play a role. As inflation cools and the economy shows signs of slowing, pressure often eases on rates.
What the Experts Are Predicting
Most economists expect rates to continue drifting downward in 2023, predicting 30-year fixed rates could fall to around 5.5% by year's end.
Fannie Mae, Freddie Mac and the Mortgage Bankers Association all forecast rates decreasing to the low 5% range at some point this year based on their latest economic models.
The Federal Reserve has also indicated that it may pause its aggressive rate hikes soon. Analysts think this could limit further increases in Treasury yields, allowing mortgage rates to inch down.
However, expert opinions vary widely, with some seeing rates remaining elevated near 6% and others anticipating more drastic drops. There is much uncertainty ahead.
How Low Could Mortgage Rates Plummet?
Just how low could rates fall if the economy cools faster than expected? Here are some scenarios:
Baseline Forecast - Low 5% Range: Most experts predict 30-year fixed rates could return to around 5.5% or slightly lower by late 2023 if inflation keeps slowing and the Fed pauses rate hikes. This would still be historically high but provide some savings for borrowers.
Mild Recession - High 4% Range: In a mild downturn, rates could fall to around 4.5% to 4.75% as the Fed cuts rates to stimulate growth. Rates reached these levels in late 2020.
Deep Recession - Low to Mid-3% Range: In another severe recession and prolonged weak recovery, 30-year fixed rates could conceivably plunge all the way back down to around 3% to 3.5%. This seems less likely barring an unexpected economic shock.
In a best case scenario, 2023 could mirror 2021 when rates hit record lows. But most experts think a return to the sub-3% environment is improbable in the near term.
The Twist - Adjustable Rates May Fall Further
One wildcard is that adjustable-rate mortgages (ARMs) could see larger decreases than fixed rates. ARMs start lower but eventually float up or down with market indices.
As the Fed cuts short-term rates in a downturn, ARM rates can decrease substantially. Fixed rates tend to be stickier. So ARM borrowers may benefit more from rate drops, despite the risks.
Impact on Homebuyers and Refinancing
Falling mortgage rates would provide tangible savings on monthly payments for prospective home buyers. This could lure some sidelined buyers back into the market.
With a 0.5 to 1% rate decrease, buying power increases significantly. At current home prices, a borrower could afford roughly 5% to 10% more home for the same monthly payment if rates fall to 5% or lower.
Lower rates also enable more existing homeowners to refinance for savings on interest costs. Break-even refinancing points are now very high due to elevated rates. But they would fall quickly if rates decrease even marginally.
Lock In Now or Wait It Out?
With rates poised to keep falling in 2023, some buyers may want to wait and see just how low they'll go before jumping in. Mortgage locks allow you to secure a low rate for 30 to 60 days.
But experts warn there are risks to waiting indefinitely for the lowest possible rate. Competition could heat up quickly driving home prices up again if enough buyers return.
And if rates only decline slightly and then rebound, you may miss the window. Working with a knowledgeable lender can help you time your purchase appropriately.
The Bottom Line
Mortgage rates should continue easing downward given cooling inflation and the Fed's shifting stance. But experts disagree on just how much rates could fall in 2023 and beyond.
While a return to historically normal rates below 5% appears achievable, a dramatic plunge is less certain. Pay close attention to market conditions, stay flexible, and consider shorter lock periods when timing your home purchase. With careful planning, lower rates could soon provide the window you need to make your housing goals a reality!