MNI INTERVIEW: US Mortgage Rates Poised To Fall- Bankers Group

U.S. mortgage rates look like they have peaked, potentially keeping a floor under home prices even with the economy on the edge of recession, Mortgage Bankers Association Chief Economist Michael Fratantoni told MNI.

The 30-year rate could decline to about 5.2% at the end of 2023 and to 4.5% by the end of 2024, he said. That would be a turnaround from the jump of almost 4 percentage points from the start of the year to just over 7% in early November. The rate has already dipped to about 6.5% on signs of slower inflation and smaller hikes from the Federal Reserve.

The Fed is largely expected to step down to a 50bp increase next week and officials are seen indicating a "somewhat" higher rate peak than previously indicated in September at 4.6%. Fratantoni said the Fed's own tightening campaign is what will set up the decline in mortgage rates as policy makers cool the economy.

"We think we're now past the peak on mortgage rates," said Fratantoni, acknowledging other forecasters see higher mortgage rates.

"The higher the Fed goes the greater the likelihood of a recession and probably the increased risk of a deeper recession," he said, noting he sees a mild recession starting in the first half of next year. "You may see long rates like a 10 year Treasury and a 30-year mortgage rate drop in response to that kind of a shock." (See: MNI INTERVIEW: US Inflation Likely At Turning Point - SF Fed Econ)

PRICES RANGEBOUND

While an increasing number of forecasters predict home prices will continue to fall in 2023, Fratantoni said the lack of inventory and the lack of distress in the market should keep prices rangebound. "Weakened demand really is leading to very rapid deceleration in the market but we see really little change in prices by the end of 2023 and maybe a slight decline as we get into 2024."

Prices will also be supported by demand from younger buyers, though a weaker economy may put pressure on new home construction next year, Fratantoni said. The housing market is also going into the slowdown on a steady footing, with mortgage delinquency rates the lowest in four decades and foreclosures running at a low rate, he said.

Fed Chair Jay Powell last week noted a longer run housing shortage and characterized the market in recent years as a "bubble" needing a reset to improve affordability.

"Most of the reset that we're going to get is through incomes going up over time and mortgage rates returning to something closer to a sustainable level over time, which is that sort of 4.5% to 5.5% range," Fratantoni said.