Clarity Real Estate Advisors works with public and private homebuilders, real estate investors, land bankers, land developers, and land brokers throughout the western U.S., deciphering the nuances of real estate market trends and providing market-based feasibility guidance. In late December, we asked our clients, “Where do you expect 30-year fixed mortgage interest rates to be in mid-2023?” According to Freddie Mac, the average interest rate at the time of our survey was 6.27%. More of our survey respondents expect rates to drop in the coming year than rise, or even stay the same.
39% of respondents expect interest rates to drop from current levels
34% expect interest rates to remain about the same as they are now
27% expect rates to rise
Over the last 50+ years, there has been a strong correlation between the yield on a 10-year U.S. Treasury note and the rate for a 30-year fixed-rate mortgage. Mortgages are considered to be riskier than U.S. Treasuries, and therefore mortgage rates are typically higher than the yield on a U.S. Treasury. The spread historically has most commonly been in the range of about 1.5% to 2.0%.
Changing economic conditions and evolving government policies influence the spread. In times of economic uncertainty, such as today, the spread usually widens. The Federal Reserve had been helping to keep mortgage interest rates lower by purchasing Mortgage Backed Securities (MBS) but stopped that program last September. In fact, not only did the Fed stop buying MBS, but they had announced in May that they might start selling off some of their MBS portfolio.
In light of weakness in the residential real estate sector, the Fed has postponed selling off portions of their MBS portfolio, providing a little more stability in the MBS market. However, with the Fed out of the market, and with economic uncertainty, investors that are in the MBS market are demanding higher returns, which has caused the 10-year Treasury vs. mortgage rate spread to widen. Over the six months ending November, 2022, the average spread had grown to 2.6%, reaching a 35-year high of 2.92% in November. Had the spread been 1.71% (the average since the early 1970s), mortgage interest rates would have been +/-5.6% in November 2022, instead of 6.8%.
Nobody knows with certainty what lies ahead for mortgage interest rates. The yield on the 10-year U.S. Treasury has dropped in recent weeks. This could lead to lower interest rates in 2023. On the other hand, the Fed has indicated that they will continue to push the Federal Funds rate higher, which impacts the cost of borrowing. A survey of members of the Mortgage Bankers Association conducted December 19, 2022, indicates expectations of declining rates in 2023.
Mortgage interest rates are a key variable impacting housing affordability and demand. The housing market had been extremely strong before rates started to rise; however, home prices are down from peaks hit in most markets in 2Q 2022. Declining prices have brought more buyers back into the market and low supply levels help provide some grounds for a pricing bottom. In fact, the rate of price declines slowed in 4Q 2022 compared to 3Q 2022. Elevated interest rates will continue to put some downward pressure on prices through at least mid-2023; however, unless the economy craters, we do not anticipate any kind of housing market meltdown like the mid-to-late 2000s. For the record, Pete is optimistic that rates will be sub 5.5% by mid-year, while Adam is expecting rates to be in the 5.5% to 5.9% range.
Clarity Real Estate Advisors is the premier real estate market feasibility consultancy in the western U.S. Call us to chat about your next deal.
Pete Reeb
President
(858) 774-7126
Pete@Ask-Clarity.com
Adam Artunian
Vice President
(949) 861-1876
Adam@Ask-Clarity.com
