Mortgage Bankers Expect Rates to Drop to 5.4% in 2023

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While history does not always repeat itself, looking at the last five recessions, dating back to 1980, each time the economy slowed down mortgage rates decreased. Mortgage rates have fallen an average of 1.8 percentage points from the peak of a recession to its low point. The Mortgage Bankers Association reported This Week in Real Estate that they expect rates to come down to 5.4% by the end of 2023 while mortgage purchase applications decline by 3% next year. We should not expect a surge of inventory either as people sit on their ultra-low mortgage rates and slowing new construction activity which means housing supply is likely to be constrained for some time. Below are a few newsworthy events from the fourth week of October that influence our business: 

What Happens to Housing When There’s a Recession? While there’s some debate around whether we’re officially in a recession right now, the good news is experts say a recession today would likely be mild and the economy would rebound quickly. According to the CEO of KPMG, “more than 8 out of 10 global CEOs anticipate a recession over the next 12 months, with more than half expecting it to be mild and short.” To add to that sentiment, housing is typically one of the first sectors to rebound during a slowdown. Part of that rebound is tied to what has historically happened to mortgage rates during recessions. Looking at recessions in this country going all the way back to 1980, each time the economy slowed down mortgage rates decreased. Fortune explains “over the past five recessions, mortgage rates have fallen an average of 1.8 percentage points from the peak seen during the recession to the trough. And in many cases, they continued to fall after the fact as it takes some time to turn things around even when the recession is technically over.”

Mortgage Bankers Expect Rates to Drop to 5.4% in 2023. “Our forecast is for home-price growth moderation to continue,” said Joel Kan, vice president and deputy chief economist at the Mortgage Bankers Association. Expect national home-price growth to “flatten out” in 2023 and 2024, he said. This might be a “silver lining” for some, Kan added, as it brings home prices back to more “reasonable levels.” The MBA is also expecting rates to come down to 5.4% by the end of next year. Don’t expect a surge of inventory as people sit on their ultra-low mortgage rates that they will likely not enjoy again in the near future. Nearly a quarter of homeowners have mortgage rates of less than or equal to 3%. And the vast majority of owners – 93% – have rates less than 6%. MBA’s Kan estimated that there are 50 million people in the 28-to-38 age demographic, of which some – or many – are likely to become potential homeowners in the future. For those under 35, the homeownership rate is only 39%, Kan said, while that share increases for people aged 35 to 44, to 61%. So as people age, “we’re fairly confident if we stick to these trends, you will see a very supportive demographic driver of housing demand for a good number of years,” Kan said.

U.S. Mortgage Originations to Decline 9% in 2023 to $2.05 Trillion. Based on new projections from the Mortgage Bankers Association, total U.S. mortgage origination volume is expected to decline to $2.05 trillion in 2023 from the $2.26 trillion expected in 2022. Purchase originations are forecast to decrease 3 percent to $1.53 trillion next year, while refinance volume is anticipated to decline by 24 percent to $513 billion. “MBA’s forecast calls for a recession in the first half of next year, driven by tighter financial conditions, reduced business investment, and slower global growth. As a result, the unemployment rate will increase from its current rate of 3.5 percent to 5.5 percent by the end of the year. Inflation will gradually decline towards the Fed’s 2 percent target by the middle of 2024.” After more than doubling so far in 2022, MBA’s baseline forecast is for mortgage rates to end next year at around 5.4 percent. The combination of still-low levels of for-sale inventory and slowing new construction activity means that housing supply is likely to remain constrained for some time.

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