Housing Market Decoded: Why 2023 mortgage rate predictions missed the mark
A year ago, many economists forecast that rates would fall within the 5-6% range by the end of 2023, but the economy didn’t behave as expected.
Decisions in residential real estate are often based on market data — sometimes conflicting, often confusing. Housing Market Decoded, authored by economists and other market experts, helps put the data in context so you can make sense of the numbers.
When I was in grad school, one of my professors used to tell us time and time again, "Forecast well, but forecast often." It's a quote that has always stuck with me — and it's rather germane to the topic of mortgage rates!
Nobody can deny that a vast majority of housing economists missed the mark by a considerable margin when offering their predictions for mortgage rates in 2023.
For example, in December of 2022, the Mortgage Bankers Association was forecasting rates at 5.2% by the end of 2023, the National Association of Realtors expected the year to end with rates at 5.7%, Fannie Mae forecast 6.1%, and I was looking for rates to have broken below 6% by the end of the year.
So how was it possible that we were all so far off the mark?
There is actually a litany of reasons, but the top one would be that we all expected the U.S. economy to slow far faster than it actually did following the almost unprecedented increase in the federal funds rate, which started in March of 2022. This is important because adjusting that rate is the primary weapon the Federal Reserve has to slow growth and counter high inflation.
If the Fed's actions had slowed the economy as intended, it would have been very reasonable to expect that they would have halted rate hikes sooner, and yields on the bonds that direct mortgage rates would have started to fall. And all of those forecasts — which turned out to be wildly inaccurate — would have been right on the money.
However, expectations of a significant slowdown in the economy and many predictions that a recession would already be in full swing have yet to come to light. The economy continues to grow, and mortgage rates remain at elevated levels.
Given the resilience of the U.S. economy, the Fed recently coined a phrase that is sending shivers across the real estate industry: "higher for longer" — meaning that although they may not raise rates any further, they aren't anticipating lowering them for quite some time.
Where do we go from here?
It's my belief that the Fed is done with rate increases. If that is correct, and assuming the bond market also starts to believe that the economy really is slowing, 10-year treasury yields will begin to trend lower, which would then allow mortgage rates to start falling.
I admit that my colleagues and I got our 2023 mortgage rate forecasts horribly wrong, but the blame can be placed firmly at the feet of the U.S. economy which ignored our calls for a significant slowdown.
I am now seeing quantifiable signs that the economy has started losing steam, and if we are right this time around, I anticipate we will end 2024 with 30-year mortgage rates somewhere around 6%.
As far as my colleagues are concerned, I am afraid there is little consensus in their current forecasts. At the high end of the spectrum, Fannie Mae is forecasting Q4-2024 rates to be 7.1%, while NAR is at 6.3%, the Mortgage Bankers Association is at 6.1% and Wells Fargo predicts 6.05%.
Despite the variance in their predictions, economists are, yet again, forecasting mortgage rates to fall in the coming year. Can I guarantee that any of us will be right? As 2023 taught us, the answer is no.
But in keeping with my professor's advice to "forecast well, but forecast often," I have certainly been revising my model with remarkable regularity. Here's hoping that his sage words will help my forecast prove to be more accurate this time around!
Matthew Gardener is the chief economist at Windermere Real Estate, where he analyzes and interprets economic data and its impact on national and local real estate markets. He is also a member of several economic advisory boards and a lecturer at the University of Washington. The views expressed in this column are solely those of the author.