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Mortgage rates are falling but that might not make homes more affordable in 2023

​Both prices and rates would have to decline sharply to revive the housing market

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Home mortgage rates, whose meteoric rise earlier this year brought the housing market to a standstill, have begun to fall.

In its weekly update the Mortgage Bankers Association (MBA) reports the average 30-year, fixed-rate mortgage fell to 6.49% this week, down from 6.67% the previous week. The rate is below 6.5% for the first time in months.

But is it enough to revive home sales? Probably not yet, though mortgage applications for a home purchase rose 4% from the previous week. But compared to the same week in 2021, applications were down 41%.

 “The economy here and abroad is weakening, which should lead to slower inflation and allow the Fed to slow the pace of rate hikes,” said Joel Kan, MBA’s vice president and deputy chief economist. “Purchase activity increased slightly after adjusting for the Thanksgiving holiday, but the decline in rates was still not enough to bring back refinance activity. Refinance applications fell another 13%, and the refinance share of applications was at 26%. Both measures were at their lowest levels since 2000.”

Low rates led to record-high home prices

Record-low mortgage rates a year ago – and near record-low rates over the previous five years – led to the record rise in home prices. With a 2.9% mortgage rate, many buyers could afford a $500,000 home. When the mortgage rate hit 7%, many fewer could.

The National Association of Realtors (NAR) reports home affordability fell in September as the monthly mortgage payment climbed 57.8% and median family income rose by 3.9%. According to NAR, a mortgage is affordable if the mortgage payment – principal and interest – amounts to 25% or less of the family's income.

While the slow pace of home buying has started to bring down home prices, Business Insider predicts it won’t do much to improve affordability in 2023. Even if there is a 20% decline in home prices, buyers would still face steep monthly payments as long as mortgage rates remain at present levels.

Buyers need a big drop in mortgage rates

If a $500,000 home falls to $400,000, the principal and interest payment at 6.5%, with 20% down, is $2,023 – and that doesn’t include taxes and insurance. 

If the rate declines to 5.5%, buying the same home would cost $1,817 a month. Lowering the rate to 4.5% would produce a monthly payment of $1,621. That may be the interest rate at which affordability sharply improves.

That said, many real estate professionals say dramatic decreases in both home prices and interest rates simply aren’t in the cards next year. Realtor.com predicts mortgage rates will average over 7% for all of 2023 and home prices, instead of falling 20%, may go up slightly because of the shortage of homes for sale.

“It’s going to be a tough year for homebuyers, home sellers, and the overall housing market,” said Realtor.com Chief Economist Danielle Hale. But “we’re going to take some steps toward a better balance between buyers and sellers.”

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