What's Ahead for Mortgage Rates and the Housing Market?

Mortgage rates have risen dramatically over the past year, topping well over 7% this fall for 30-year fixed rate loans. The housing market is slowing as buyers get priced out and sellers adjust expectations. When can buyers hope to see some relief?

Increased Affordability Ahead?

Some positive changes are already unfolding. Fannie Mae and Freddie Mac are both moving to allow lower down payments on 2-4 unit homes when used as a primary residence. Instead of requiring 15-25% down previously, buyers can now put just 5% down on duplexes, triplexes, and quadplexes they'll live in.

This opens up a popular "house hacking" strategy often used by first-time buyers. Living in one unit while renting the others provides rental income to help afford the mortgage. With today's high home prices and rates, creative solutions like this are essential for affordability.

Higher Loan Limits Offer More Purchasing Power

Another major change coming next year is higher conforming loan limits. Baseline limits for loans eligible for backing by Fannie and Freddie will likely rise by approximately $25,000. 

The increase reflects ongoing home price appreciation. With prices up around 8% annually in many areas this year, the baseline limit is expected to jump from $726,200 to $750,000 or more in 2023.

Buyers purchasing homes above the 2023 limit of $726,200 will benefit. The higher limits let them obtain lower rate conventional financing rather than pricier jumbo loans.

Signs of Improvement on Inflation

Broader economic conditions have a major impact on rate trends and housing activity. On the inflation front, there are signs of improvement after a year of sharp increases.

The Federal Reserve's CPI metric has come down for six straight months to 4.1%. Shelter inflation is also declining, which should bring the overall number down further in coming months.

This easing of inflationary pressures reduces the need for continued aggressive rate hikes by the Fed. Mortgage rates tend to track the yield on 10-year Treasury notes, which often moves based on Fed policy and inflation expectations.

Job Market Weakening Under the Surface

However, inflation isn't the only factor at play in the Fed's decision-making. The strength of the labor market also heavily influences their actions.

Recent jobs data presents a contradictory picture. While headline job growth and unemployment numbers seem strong, other indicators show underlying weakness. 

Wage growth, jobless claims, and the quits rate all point to softening. Layoffs are also rising sharply. And most of the job gains are in part-time and government roles rather than higher-quality private sector jobs.

This suggests the job market is weakening more than the top-line numbers indicate. The Fed likely needs to see more definitive signs of weakness before changing course on rate hikes.

Bottom Line

Economists expect housing and rates may see a turning point soon if inflation continues easing and job market deterioration accelerates. The Fed could stop rate hikes at that point, helping stabilize mortgage rates.

While a rapid plunge back to 3% rates is unlikely without a recession, there is hope rates could drift back toward 5% in 2024 as the Fed approaches the end of tightening. Homebuyers and sellers should prepare for more volatility ahead, but can remain cautiously optimistic on the long-term outlook.