Are mortgage rates going up or down? During the last few weeks, they've come down slightly. It might be wishful thinking to believe rates will ever be as low as they were in 2020 and the beginning of 2021.
The U.S. Federal Reserve (FED) has a goal of moving inflation back down to 2%. So far, their aggressive rate hikes have been moving the CPI reading in the right direction. The rate of inflation for December 2022 came in at 6.5%, lower than the 7.1% reading for November. In June, this number peaked at 9.1%.
For the sixth straight month, inflation numbers have been dropping. The annual reading was at 6.5%, which is the lowest it’s been since October of 2021. At this rate, it may not reach 2% until the end of 2023.
The inflation reading is important because it has a direct impact on how the FED raises its rate. The prime rate is usually 3% higher and determines what lenders will charge for mortgage rates. The current FED rate is at 4.25 to 4.5%. In December, the FED indicated this rate will exceed 5% in 2023.
Four times during 2022, the FED raised the prime rate by 75 basis points. In December of 2022, they eased this hike to only 50 basis points, and mortgage rates adjusted down slightly. Lenders too, respond to supply and demand and reduce their margins (based on prime rate) accordingly.
The FED uses these rate increases to make credit more expensive. This is their tool to slow the rising prices of homes and other consumer products. As expected, the real estate market has cooled. The challenge is to reduce inflation without causing a recession.
The next decisions on these hikes will occur on February 1st, March 22nd, and May 3rd. During the first weeks of January, the stock market rallied on lower inflation numbers, betting that the FED would be less aggressive in 2023.
According to an article in
Forbes, the market is betting that the FED rate won’t rise as high as 5% and that cuts may occur in the last quarter of 2023. Everyone expects rates to rise at the beginning of 2023, the question is: how high?
This presents an interesting opportunity for buyers right now. For the week ending January 12th, the average interest rate for a 30-year fixed-rate mortgage fell to 6.33%, according to Freddie Mac. The prior week, mortgage rates averaged 6.48%.
Since September, mortgage rates have fluctuated between 6 and 7%. Freddie Mac’s Chief Economist Sam Khater, said these week-to-week changes are increasing purchase demand.
"While mortgage rates have resumed their decline, the market remains hypersensitive to rate movements, with purchase demand experiencing large swings relative to small changes in rates," Khater said. "Over the last few weeks, latent demand has been on display with buyers jumping in and out of the market as rates move."
The problem with waiting for interest rates to come down is that the mortgage industry is using fluctuating demand to adjust its rate offering. Everyone agrees that the FED will be raising their rate into 2023. As more buyers enter the market, rates may be closer to the prime rate, which is
currently at 7.5%, This may be a good time to lock in your interest rate.
Additionally, looking at rates over the last few decades, the 6% rate may be closer to normal. During the pandemic, the FED dropped its rate to almost 0%. Comparing rates against the last few years may not offer an accurate picture of the norm, which is closer to 7%.
In Lake Tahoe right now, we only have a couple of months of inventory supply, which reflects an absorption rate that is still in the seller's favor. Of course, our market will always have a limited supply because new developments are not inhibiting resale values.
Contact me today for more information about available homes for sale. We have kicked off the 2022/2023 ski season with epic snowfall. I'd love to help you find the perfect mountain retreat.
