Could Mortgage Rates Fall to 4.5% Next Year?

Many experts think mortgage rates will keep rising, but several experts see a big reversal.

Mortgage rates in the United States have climbed at a historic pace so far in 2022. The 30-year fixed rate average contract interest rate is currently 6.7%, sharply higher than the 3.3% rate the average home buyer would have qualified for at the beginning of the year.

One big question on the minds of many would-be home buyers is "What's next?" Will interest rates keep rising to 8% or even 10% before cooling off? After all, double-digit mortgage rates were common in the early 1980s, the last time inflation was as high as it is now. Or will the cooling real estate market and overall economy cause mortgage rates to peak and then fall back down toward where they were?

Conflicting opinions

There's little agreement on where mortgage rates go next, and that certainly makes sense -- after all, nobody has a crystal ball that can predict where rates will go, and there is tremendous economic uncertainty right now.

That said, most consumers seem to think mortgage rates will keep going up. According to a recent New York Federal Reserve housing survey, mortgage rates are expected to be 6.7% (about where they are now) at the start of 2023 and continue rising. By 2025, the consumers who participated in the survey expect the 30-year mortgage rate to reach 8.2%, which would be the highest since 2000.

Some experts see things going the other way. Mortgage giant Fannie Mae predicts that 30-year mortgage rates are going to cool significantly, averaging 4.5% in 2023. The Mortgage Bankers Association sees mortgage rates dropping to 4.8% by the start of next year. And the National Association of Realtors sees rates in the 5% to 5.5% range next year, still significantly lower than where they are now.

Opposing forces are at play, and uncertainty is in the air

To be sure, there are some forces that could push mortgage rates significantly higher than where they are now. The Federal Reserve has been raising benchmark interest rates aggressively, and while the pace of increases is expected to slow, the consensus is that there are at least 100 basis points of rate increases still ahead of us. While the benchmark federal funds rate isn't directly tied to mortgage rates, the two tend to move in the same general direction over time.

On the other hand, weak economies tend to be a negative catalyst for mortgage rates. As an example, I just mentioned that the last time mortgage rates exceeded 8% was 2000. After that, the economy fell into recession soon after as the dot-com bubble burst. Rates fell into the 5% range by 2003, and the initial decline in mortgage rates started before the Federal Reserve made any interest rate moves.

The bottom line

There's a lot of uncertainty when it comes to the future direction of mortgage rates in the United States, but don't just assume they'll keep going up. If the Federal Reserve's rate hikes have the desired effect of cooling off the economy and getting inflation in check, rates could start to fall sooner and faster than you might think. If you'd like to buy a home but have been experiencing a bit of sticker shock when it comes to mortgage payments, you may get an opportunity to get an affordable mortgage as soon as next year if these real estate experts' predictions are accurate.