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If you’re a U.S. homebuyer hoping for the return of the incredibly low mortgage rates of around 3 percent, don’t count on it. According to Lawrence Yun, the chief economist at the National Association of Realtors (NAR), the brief era of 3 percent interest rates for 30-year fixed mortgages is behind us and may not reappear anytime soon – perhaps not for decades.
“One can never truly predict the future, but I don’t see mortgage rates returning to the 3% range during the remainder of my lifetime,” Yun told CNBC. Historically, 30-year fixed mortgage rates have averaged closer to 7% over the past half-century, as per data from Freddie Mac.
So, why are super-low mortgage rates unlikely to return? Yun points out that these historically low rates during the pandemic were “an exceptional measure, during exceptionally uncertain times.” The covid-19 pandemic brought economic uncertainty not witnessed since the 2008 financial crisis. To combat this, the Federal Reserve employed strategies similar to those used in 2008, injecting capital into the economy to stimulate growth.
In line with these measures, the Fed slashed interest rates to nearly 0 percent, initiated emergency lending programs, and engaged in quantitative easing by purchasing government bonds and mortgage-backed securities. Consequently, mortgage interest rates reached a rock-bottom low of 2.67 percent in January 2021.
But, unlike the 2008 scenario, the economy rebounded quickly, and rising inflation became a concern. By spring 2021, inflation had exceeded the Fed’s 2 percent benchmark, prompting the central bank to raise interest rates, which, in turn, led to an increase in mortgage rates.
“It’s unlikely that the Federal Reserve will respond with the same breadth and aggressiveness like it did in 2020, as the very low mortgage rates in 2020 were caused by very unique circumstances” related to the pandemic, says Abbey Omodunbi, senior economist at PNC Financial Services.
Right now, the average mortgage rate for a 30-year fixed-rate mortgage stands at 6.81 percent as of July 6, slightly lower than its November peak of 7.08 percent, based on Freddie Mac data.
Fannie Mae predicts similar figures, with an average rate of 6.6 percent for the rest of 2023 and 5.4 percent for 2024. The Mortgage Bankers Association anticipates a drop to an average of 5.8 percent by the end of 2023, further declining to 4.9 percent in 2024.
Redfin, however, predicts mortgage rates will fall to about 6.6 percent and prices will drop 1 percent as new listings find their way onto the market.
“A perfect storm of inflation, high prices, soaring mortgage rates and low housing supply caused 2023 to go down as the least affordable year for housing in recent history,” Redfin Senior Economist Elijah de la Campa said in a statement to CNBC. “The good news is that affordability is already improving heading into the new year.“
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