Grey downward arrow over image of house and percentage sign
Illustration by Lanette Behiry/Real Estate News

Interest rates continue downward trend, but what’s next is unclear 

This week's rate of 6.13% is nearing a level where it may create some demand, particularly from first-time homebuyers.

January 26, 2023
3 minutes

Key points:

  • The 30-year fixed-rate mortgage averaged 6.13%, slightly down from last week’s 6.15%.
  • "Home purchase demand is thawing," and mortgage applications were up this week.
  • It’s still an uncertain time, however, as the spring buying season approaches.

Mortgage rates continued their downward trend this week, but the outlook remains muddy when looking ahead to the spring.

Freddie Mac's weekly survey put the 30-year fixed-rate mortgage at 6.13%, down from 6.15% the week before.

"Mortgage rates continue to tick down and, as a result, home purchase demand is thawing from the months-long freeze that gripped the housing market," said Sam Khater, Freddie Mac's Chief Economist. "Potential homebuyers remain sensitive to changes in mortgage rates, but ample demand remains, fueled by first-time homebuyers."

While homebuying activity remains way down year-over-year due to affordability, economist Jiayi Xu said the demand from first-time homebuyers could start a rebound.

"Decreased competition may have presented opportunities for some first-time home buyers," said Xu, noting that the share of first-time buyers rose in December to 31%, up from 28% in November.

With mortgage rates dropping the previous few weeks, more people were putting in applications, according to the Mortgage Bankers Association. MBA's weekly survey estimated applications were up 7% for the week ending Jan. 20 compared to Jan. 13.

Still, applications are down significantly from a year ago, said Joel Kan, MBA's deputy chief economist.

"Homebuying activity remains tepid, but if rates continue to fall and home prices cool further, we expect to see potential buyers come back into the market. Many have been waiting for affordability challenges to subside," Kan said.

With interest rates at the current level, the typical annual income for an American family is now slightly higher than what is needed to purchase a median priced home (and have an affordable monthly payment), said Nadia Evangelou, senior economist at the National Association of Realtors.

Signals from monetary policy and labor market updates next week could be predictors of where mortgage interest rates head next.

"More evidence of weakness in leading economic indicators would help to resume the downward pressure on mortgage rates," said Orphe Divounguy, senior macroeconomist at Zillow Home Loans.

Even with the data that comes out next week, there is plenty of uncertainty about where rates might be going, said Lisa Sturtevant, chief economist at Bright MLS.

"The Fed only indirectly impacts mortgage rates. Mortgage rates are most closely tied to the yield on the 10-year Treasury note, which has been moving lower as concerns about the possibility of a recession have intensified," Sturtevant said. "As a result, we could see mortgage rates continue to move lower, though it is likely that they will remain in the 6 to 6.5 % range into the spring housing market."

Freddie Mac estimates the 15-year fixed-rate mortgage averaged 5.17% this week, down from 5.28% last week. A year ago it was at 2.8%.

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