If you're a home buyer looking in 2023 here's the mortgage rate drop you can expect

Mortgage rates and inflation have an interesting relationship that's important for home buyers in 2023.

If you're a home buyer looking in 2023 here's the mortgage rate drop you can expect

Are you looking to buy a home, but the tumultuous economy has you unsure when you should make a purchase? We can help with some timely information.

We've lived and worked on the South Shore for over thirty years at Doran-Hall real estate. That means we've seen home prices rise and fall more than a few times.

We're confident home prices will go down over the next year - and mortgage rates along with them.

Explained: Why Home Prices Drop

Home prices in any given market tend to drop for one of two reasons:

  • An increase in local home supply
  • A decrease in demand for homes

If you've followed any real estate news for the last five years, you'll know we've been experiencing a home availability crisis in the U.S.

Simply put, there need to be more homes available for people to buy. But creating new home inventory takes time to develop. Sometimes even decades.

So why do we think home prices will go down? It's simple, really (if not seemingly illogical):


Inflation Makes Mortgage Rates Go Up - And Down Too!

When the prices of things go up (i.e., inflation), it devalues the U.S. dollar.

When the dollar's value drops, so do prices of investments called "mortgage-backed securities" (sometimes referred to as "bonds" because they're traded on the bond market). Banks that provide mortgages offer these securities to investors, similar to government bonds.

When these bonds see price drops due to inflation devaluing the dollar, the returns (or "yields") must go higher to ensure confidence. As those yields increase, mortgage rates climb in lock-step as banks reduce their long-term risk.

That's where we are now as we approach the end of 2022. And that's why it's all about to change.

Image courtesy of The Mortgage Reports

How Inflation Eventually Drives Mortgage Rates Down

Inflation and mortgage rates are both parts of a fairly predictable cycle.

When rates go up, borrowers stop borrowing. When borrowers stop buying homes in large enough numbers for an extended period, home prices start to drop.

People still have to sell homes for retirement, work moves, or to cash out equity but are forced to drop prices to lure buyers from a much smaller pool of home shoppers (due to higher mortgage rates).

Thus, the cycle begins again:

  • Inflation drives down interest in mortgage-backed securities, so yields (and mortgage rates) go up.
  • Steep mortgage rate rises discourage borrowing for home buying
  • As the pool of home buyers dries up, home prices drop.
  • As home prices fall, banks lower rates to sell more loans that back all those mortgage-backed securities.

It may not make much sense, but it's how our national economics work.

How Far Will Mortgage Rates Drop

As of the writing of this piece, mortgage rates have now gone up past 7%, the highest rates since 2002.

In an article posted today, the New York Times quotes the Chief Economist at Freddi Mac as follows:

“As inflation endures, consumers are seeing higher costs at every turn, causing further declines in consumer confidence this month,” Sam Khater, the chief economist at Freddie Mac, said in a statement. “In fact, many potential home buyers are choosing to wait and see where the housing market will end up, pushing demand and home prices further downward.”

But, as we've mentioned, this is all about to change. Here's a round-up of mortgage rate (and home price) predictions for 2023:

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

MarketWatch - Mortgage bankers expect rates to drop to 5.4% in 2023. Here’s what that means for home prices.

HousingWire - The case for mortgage rates to fall in 2023

Economist - A global house-price slump is coming

Zillow- Expert Panel: Expect a Buyers Market by 2023

With a recession looming and the inevitable economic cycles of inflation, home prices will drop in 2023. When they do, and when buyers show they're ready to buy again, expect mortgage rates to drop too.

Mortgage rates are topping 7%, and most experts predict 2023 rates in the mid-5 % range.

This may be the right time to make the move you've been scared to make.

Need help finding a home or a mortgage?

We've been serving the South Shore with exceptional real estate for decades. Get in touch today and let us help!