The Ten: Looking back on a year of mortgage rate madness 

Editor's Note: In a historic year shaped by trials — of all kinds — a handful of people and themes have emerged as defining forces. Real Estate News has selected the top newsmakers of 2023 who have left a mark on the industry or shown perseverance in the face of epic challenges and opportunities. They are The Ten.

The Ten: Interest rates

High borrowing costs were a primary culprit behind 2023's lackluster housing market, which saw existing home sales and pending home sales drop to the lowest levels in years. 

By October, some buyers found themselves facing mortgage interest rates as high as 8%. According to historical data from the Federal Reserve, the last time the country saw an average 30-year fixed rate mortgage of 8% or higher was during the dot-com crash in 2000. 

Experts blamed high interest rates for low inventory and low buyer activity as the market continued to reel from the pandemic-fueled housing boom. And they consider mortgage rates the potential spoiler for a promising 2024, though the Fed on Dec. 13 said it was planning on at least three rate cuts next year.

The lock-in effect held back would-be movers

As the Fed worked to tame inflation, raising the federal funds rate 11 times between March 2022 and July 2023, there were inevitable side effects, including impacts on the housing market. Many homeowners across the country chose to stay put — in a home with a record-low mortgage interest rate — despite changes in their financial situation or life events that would typically spur a move.

Federal Reserve Chair Jerome Powell acknowledged this rate "lock-in" trend during September's Fed board meeting, but said it wouldn't sway the Fed's future decisions on interest rates. 

The housing market has experienced many boom and bust cycles, but this year's rate lock-in was unique to this moment, Rick Sharga, founder & CEO of CJ Patrick Company and longtime residential real estate analyst, told Real Estate News. 

"We've never seen mortgage rates as low as they got during 2021 and 2022, and that's why we've had this whiplash effect when mortgage rates went up," Sharga said. "When you compare today's 7% loan to a 2.5% to 3% rate, it basically makes it impossible for that borrower to move away from that lower price loan and get a new one."

'Marry the house, date the rate'? It's complicated

As borrowing costs increased throughout 2023, some agents encouraged hesitant buyers to look past those 7-8% mortgage rates, suggesting that they would likely come down in the future, at which point buyers and homeowners could refinance.

That approach could be risky, said Sharga. "I wouldn't advise somebody to 'marry the house and date the rate' if they're going to be overextending to get into the house today," Sharga told Real Estate News in May. "You should look at rates going down in a couple of years as a surprise bonus."

Rates have been falling in recent weeks, and there are signs they will continue to drop in 2024. So, were agents correct in telling their clients to "date the rate"? It's a little more complicated, Sharga explained.

While rates have now started to retreat, they had steadily increased towards 8% for weeks, "so all of a sudden, seven feels pretty good," he said in early December. But there's still risk for people "buying a house counting on mortgage rates to go down," Sharga cautioned, adding that those buyers are "potentially making a big mistake."

What comes next

NAR chief economist Lawrence Yun has urged the Federal Reserve to reverse its monetary policy and cut rates to prevent further gridlock in the housing market.

"I think it's inevitable that the Fed will be cutting interest rates three or four times next year," Yun told Real Estate News, shortly before the Fed acknowledged its plans to do so. "But the bond market is already anticipating that and consequently, mortgage rates have actually tumbled down in the past five weeks."

This could be good news for agents and consumers, he explained.

"Agents should be expecting to prepare for a lower interest rate environment, which means more buyers and more sellers coming onto the market," he said, predicting that 6% could be the magic number that finally changes the equation for sidelined buyers and homeowners who have been reluctant or unwilling to list their homes for sale.