2022 was certainly an interesting year for mortgage interest rates amid continuing inflation and Federal Reserve rate hikes to combat it. With that in mind, I thought it might be helpful to offer an overview of the past year and a look ahead at what may be to come in 2023.

A Bird’s Eye Overview of 2022

Higher mortgage interest rates were the norm in 2022, with the Federal Reserve raising interest rates a total of seven times to battle inflation. Higher rates have resulted in softer single-family home prices, creating a more favorable environment for buyers in many localized markets.

Fortunately for would-be borrowers, mortgage interest rates also pulled back from highs as 2022 ended and 2023 began.

Questions remain, however: What will drive mortgage interest rates into the first quarter of 2023? Have interest rates peaked yet?

U.S. Federal Reserve

For the first quarter of 2023, all eyes are on the first two Federal Reserve meetings, the first being on February 1st and the next on March 16th. The current consensus is for a 0.25% rate hike in February and another 0.25% rate hike in March.

The expected rate hikes may be priced into current mortgage interest rates. But should the Fed decide to be more aggressive and raise rates higher than expected, rates on popular mortgage products could rise further.

The current narrative remains focused on inflation and how high the Fed will have to raise interest rates to tame it. As a result, there are mixed opinions on the direction of interest rates throughout 2023.

In the meeting minutes release from the Federal Reserve’s December meeting, the Fed sent a clear signal that it will not cut interest rates in 2023. This is not good news for those hoping for rates to decline courtesy of the Federal Reserve.

Expert Market Predictions into 2023

  • Mortgage giant Freddie Mac forecasts an average rate of 6.4% for 30–year fixed rate mortgages in 2023.
  • Zillow Senior Economist Jeff Tucker said, “After a very volatile autumn, 30-year mortgage rates are settling into the mid-to-upper 6% range. That’s still about double their level at this time last year, but a little relief after peaking above 7%…. There’s not much reason to expect rates will take off upward again, and in fact, if we keep seeing encouraging, lower inflation indicators, there’s a good chance of rates actually declining. To be conservative, I’d still expect them in the low-to-mid 6% range by year’s end.”
  • National Association of Realtors (NAR) Chief Economist Lawrence Yun said: “The new normal for mortgage rates looks to be near 7% for the 30-year fixed rate. A better rate of 6% will be available to those willing to go with a five-year ARM.”

Other expert predictions vary, with some being lower and some higher. A more comprehensive list is viewable here.

Single-Family vs. Multi-Family Home Markets

While existing home sales continue to decline—creating more favorable terms and pricing for buyers—inventories are still lower than expected. The result is a market that can be favorable for buyers, but with a somewhat limited selection.

Multi-family values have held more firmly versus their single-family counterparts, as rents have remained elevated in most markets.

Some view multifamily as a preferred inflation hedge. Historically, having a two-, three-, or four-unit has been an excellent way to create equity while providing cash flow. Also of note, many residential loan mortgages can cover up to four units without being classified as commercial.

That said, 2023 could be an opportunistic environment but with a unique set of challenges in this area.

The Takeaway

Interest rates have pulled back from their November 2022 highs, as has single-family housing in most markets. Multi-family ask prices remain firm, with rents remaining steady to elevated in most markets.

30-year fixed mortgage interest rates are forecasted to remain close to present levels by market experts. Compared to recent history, 30- and 15-year mortgage rates in the sixes are still quite favorable.

While these rates are not as low as everyone would like them to be, the softer single-family pricing can help in partially offsetting higher rates. 5/1 adjustable-rate mortgages (ARMs) can also make sense, depending on your situation.

With that overview noted, if you have been considering your options in the current market, know that I am here to help you navigate decisions with clarity and confidence. Reach out anytime.