Buyers Coming Back into the Market on Lower Interest Rates

Written by Ashley Sutphin Posted On Tuesday, 07 February 2023 00:00

Last year, mortgage rates were soaring, hitting numbers not seen since 2008, which led to major slumps in housing activity. Homes were seeing fewer offers and sitting on the market for longer, so some homeowners decided to exit the market altogether and stay in their homes.

Now, rates are decreasing, and buyers appear to be returning to the market.

Recent data from the Mortgage Bankers Association showed that mortgage applications went up 7% last week compared to the previous week. Mortgage rates are currently at the lowest since September 2022, about one percentage point down from the peak rate we saw last fall.

As we start to gear up for the spring season when buyers are notoriously active, many builders, real estate professionals, and sellers hope that lower rates and increasingly available homes will help first-time buyers see more affordability.

A senior economist for Moody's Analytics recently said that they expect the labor market to remain strong, with wages continuing to rise. The analyst said they might not rise at the pace seen during the pandemic, but as interest rates stabilize, it could create opportunities for more people to enter homeownership.

According to analysis from the chief economist at Freddie Mac, potential buyers are waiting for rates to go down more significantly in some cases. The Freddie Mac analyst said that when homebuyers feel like the interest rates have gone down a bit more or perhaps stabilized, they're likely to enter the purchase market—especially Millennials.

Factors that could be pushing interest rates back down include a slowing economy and less inflationary pressure.

Long-term interest rates tend to reflect the current economic growth and inflationary picture and the future.

Recent data from France showed that inflation is slowing, at least overseas, and that could also be a trend we see showing up in the U.S. soon.

Another relevant factor was the ISM manufacturing index. That report looks at how strong the manufacturing sector is, and it's an important indicator of the overall state of the economy in America. The latest report showed the index fell again to the weakest reading since spring 2020. Supply chains are starting to get repaired, and weakening demand is putting some pressure on the prices of goods.

These are all factors that can play an indirect role in mortgage rates.

There's a general uncertainty about 2023 and how interest rates might shape up. Higher rates probably aren't going anywhere anytime soon, but most analysts feel the most significant increases are now behind us.

Fannie Mae predicts that 30-year fixed rates will trend downward throughout the remainder of 2023 and 2024, but this hinges on whether or not the Federal Reserve can successfully manage inflation, getting it under control.

Over the previous 12 months, the Consumer Price Index has gone up 6.5%, although that is a significant slowdown compared to inflation at the beginning of the year. Some would-be homebuyers are hopeful that mortgage rates will begin to come down.

While home prices are declining, there are not expected to be any major drops, even in a recession.

According to the S&P Case-Shiller Home Price Index, prices remain up year-over-year, but they've fallen monthly. Fannie Mae's researchers see prices declining by 4.2% in 2023, and the Mortgage Bankers Association expects a decrease of 0.6% in 2023 and a 1.2% decrease in 2024.

Finally, one factor that's likely to keep home prices from going too low is the historically limited supply.

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