On this day last year, mortgage lenders were locking borrowers into 3.125% rates on 30-year fixed mortgages. Then overheating inflation fueled the great mortgage rate spike of 2022, and rates peaked at 7.375% on October 20, 2022.
Now, as inflation cools, mortgage rates today are about 1.125% lower than that peak. You can see this mortgage rate trend in the chart above.
And the chart below shows the inflation cooling trend.
The blue line is the Consumer Price Index (CPI) which peaked at 9% in June, then dropped five straight months to November’s reading of 7.1% that came in today. To set rate policy for its inflation battle, the Fed cares more about the red line, Core CPI, which excludes more volatile food and energy prices.
Core CPI peaked at 6.6% in September, then dropped in each of the last two months to November’s 6% reading that came in today.
About .625% of the mortgage rate drop (from 7.375% peak to today’s 6.25% range) came after October’s Core CPI was reported lower on November 10.
You can see this big mortgage rate drop in the chart above.
Mortgage rates have drifted lower since then, shaving another 0.5% off peak rates.
Core CPI at 6% is still drastically above the Fed’s target of 2%, so expect them to keep raising overnight bank-to-bank lending rates as we move into 2023, and hold rates higher as we move through 2023.
But mortgage rates are only influenced by Fed actions, not set by the Fed. Mortgage rates are set by mortgage bond trading, and traders will always trade ahead of Fed actions.
And if mortgage bond traders believe the Fed will defeat inflation, they’ll bid up prices of mortgage bonds, which will drive rates down.
The next major Fed action is tomorrow’s final rate policy decision of 2022.
Expect the Fed to use strong inflation-fighting language to encourage markets — including mortgage bond traders — not to get too far ahead of anticipated Fed actions.
We can also expect the Fed won’t hike overnight bank-to-bank lending rates as sharply as their last four hikes of 75 basis points each.
All of this means home buyers will see lower rates in 2023, and may see less severe home price declines than some headlines claim.
Accordingly, buyers shouldn’t expect the bottom to drop out for home prices — because lower rates will bring more buyers back.
Likewise, sellers can’t expect home prices to stop dropping, or resume a sharp rise imminently.
Therefore, buyers should have more negotiating power with sellers in 2023 than they did in 2020 and 2021.
Sweet spots will emerge for buyers and sellers across local U.S. markets as this plays out. To stay prepared, you need to stay engaged with your local lender and realtor to keep loan pre-approvals and local market home price analysis updated.
More shortly, and please reach out with questions or comments.