“However, with this increase, we expect this is the peak rate for this cycle, and potential homebuyers and their mortgage lenders may be breathing a sigh of relief. We continue to expect that mortgage rates will drift down over the course of the year as the economy slows, as we move closer to the Fed lowering rates beginning in 2024, and as financial market volatility finally begins to settle down.”
With the latest nominal rate hike, Fratantoni suggested, the Fed is telegraphing it may finally pause on future interest rate increases as it fights inflation: “Although recent speeches by Fed officials had indicated an increasing amount of disagreement regarding the next steps for policy, this was another unanimous vote,” he said.
“We expect that the Fed will be ‘data dependent,’ and certainly would react to any renewed increase in inflation, but today’s statement is consistent with a plan to pause rates at this level. Inflation is likely to trend down over the course of the year, particularly as weakness in the rental market begins to be reflected in the inflation numbers.”
The housing sector continues to play a central role in the real-life drama pitting the protagonist Federal Reserve System against its inflation foe: “In the near term, tighter credit conditions will slow the pace of economic activity,” Fratantoni said. “The housing sector is already operating under tight credit, so we don’t expect this headwind to outweigh the benefits from somewhat lower mortgage rates. The housing market is likely pulling the economy out of this slowdown, as it typically does.”
And yet, a happy ending – one with ample single-family homes ready to be moved into dotting the landscape – may be elusive as the plot continues to unfold: “While lower mortgage rates will help with affordability, they won’t solve for the lack of inventory on the market, particularly of existing homes,” the economist noted. “This lack of supply will continue to be the primary constraint on home sales through 2023.”