Mortgage Rates Tick Up as Recession Fears Shrink

The 30-year fixed mortgage rate rose slightly this week to 6.49%, from 6.46% a week ago. Even with this increase, the average rate for this home loan product remains near its lowest level in four months. Rates ticked up for longer-term fixed-rate mortgage products, while adjustable rates and short-term fixed rates continued to trend downward.

Here are the current mortgage interest rates, without discount points unless otherwise noted, as of Jan. 26:

”Mortgage rates ticked up this week … as the market jockeys for position ahead of next week’s updates on monetary policy and the labor market.”

— Orphe Divounguy, senior macroeconomist at Zillow

As mentioned in our 2023 mortgage forecast, weekly and monthly movement in interest rates this year will be fueled by the Federal Reserve’s perceived reaction to incoming economic data. Rates are likely to rise if investors believe the Fed will sustain its tight monetary policy, and they’re likely to fall if policymakers slow or reverse the direction of benchmark rate hikes.

With inflation coming down and persistent labor market strength, “the risk of a recession may be waning,” Divounguy says. It’s already anticipated that the Fed will increase rates at a slower rate in the coming months, but the central bank may not lower rates anytime soon if the economy is strong.

“All that said, the outlook for rates remains cloudy,” Divounguy continues. “Indeed, data released this week from the Conference Board and the S&P Global Flash US PMI Composite Output Index suggest that a recession is still very much a possibility.”

If the U.S. economy does enter a recession this year, the Fed is more likely to loosen its monetary policy, which would cause rates to decline. That’s the base case for the remainder of 2023, but there’s always the chance that economic conditions improve – which could motivate the Fed to stay its course, resulting in elevated mortgage rates.

Higher monthly mortgage payments – as a result of rising interest rates – plagued the housing market in 2022. But at the close of the year, homebuyers enjoyed some relief as mortgage rates fell slightly from their peak.

The median monthly payment among mortgage applicants fell to $1,920 in December, according to the Mortgage Bankers Association. That’s down from the record high of $2,012 seen in October, when the 30-year fixed mortgage rate abruptly eclipsed 7%.

However, this pullback in monthly payments has everything to do with interest rates and little to do with home prices. The average home price among mortgage applicants in December was $300,000, an increase of nearly $3,000 from the month prior. But in the coming months, home prices are expected to slow or even fall in some regional markets.

“With inflation cooling slightly, MBA expects both mortgage rates and home-price growth to soften, which along with cooling inflation, should help bring more prospective buyers into the market during the spring homebuying season,” says Edward Seiler, associate vice president of housing economics at MBA.

Take this example: If a buyer purchased a $350,000 home with a 20% down payment in October at a 7% mortgage rate, the monthly principal and interest payment would be $1,863. If rates fall below 6% in the spring as many forecasters predict, let’s say to 5.75%, that monthly payment for the same home price would be $1,634. And if the buyer is also able to negotiate the home price down by 10%, the payment would fall further to $1,471.

Falling home prices and lower mortgage rates have the potential to save borrowers hundreds of dollars on their monthly mortgage payments, which could bring more prospective homebuyers to the table. And while home sales are expected to improve slightly from the lows seen in the past few months, activity in the market will likely continue to be stifled. With less competition, some buyers, particularly first-time homebuyers, may see this as an incentive to come off the sidelines in 2023.