Where the Mortgage Industry Is Heading in 2023

Rising interest rates in 2022 have spooked many home buyers. It wasn’t easy seeing inflation run rampant throughout the year, driving up the cost of everything from gasoline to the interest rates on new mortgages.

But trends at the end of 2022 could hint at what real estate agents and home buyers should expect from the coming year. And if you read the tea leaves, there is enough information that may hint at a cooling-off year for mortgage rates that could ease real estate conditions in 2023.

Will Home Buyer Confidence Increase in 2023?

Increasing interest rates in 2022 haven’t done much to soothe the nerves of home buyers. According to MortgageNewsDaily, rates on a 30-year fixed mortgage average are around 6.14% as of January 10, 2023.

Trading Economics points out that this number is down from higher levels at the end of 2022. Mortgage rates hit as high as 7.14% in late October and early November. And the good news is that while mortgage rates increased in 2022, they’re still historically below average.

Still, that may not be enough for the average home buyer waiting for housing prices to come down, along with a decrease in mortgage rates–or is it?

According to Fannie Mae, home buyers aren’t quite as put off as you might think.

“The percentage of respondents who say it is a good time to buy a home increased from 16% to 21%, while the percentage who say it is a bad time to buy decreased from 79% to 76%. As a result, the net share of those who say it is a good time to buy increased eight percentage points month over month,” reported Fannie Mae.

That data comes from the end of 2022, highlighting that there’s still plenty of money in the hands of home buyers looking on the market.

That means this data is a positive indicator for mortgage lenders who hope that when mortgage rates do come down. Many home buyers sitting on the sideline may be ready to move swiftly when conditions improve.

Will mortgage rates start settling any time soon? It may be impossible to answer that question without watching the Federal Reserve. Throughout 2022, the Federal Reserve raised interest rates aggressively to help curb inflation, ticking them upward seven times in 2022 alone. Any move from the Federal Reserve could significantly impact where mortgage rates go from here. Investors who want to know what will happen to mortgage rates should continue watching the Fed funds rates.

Mortgage Initiations Could Be Set to Rebound

Challenges and opportunities. Those were the two keywords in a recent report from S&P Global Intelligence. This report highlighted how damaging the higher mortgage rates have been for mortgage lenders, which has affected how many home buyers are initiating new mortgages.

“Wells Fargo reported mortgage banking income of $324 million in the third quarter, down from $1.3 billion in the first quarter of 2021, while JPMorgan reported $314 million in the third quarter, down from $704 million in the first quarter of 2021,” according to the report.

According to the Mortgage Bankers Association (MBA), we should see mortgage originations totaling about $2.245 trillion in 2022. That might sound like a lot, but it’s down nearly 50% from the $4.436 in mortgage initiations we saw in 2021.

Lower interest rates may bring mortgage action back from the sidelines as home buyers seek to capitalize on potentially-lower rates in 2023 vs. late 2022. That means we enter 2023 with many home buyers skittish about taking on new mortgages. But a decrease of nearly 50% can’t last forever.

What Happens When Mortgage Rates Come Down?

The good news is that many expect mortgage rates to cool off in 2023, which should help ease economic conditions and get mortgages flowing again.

According to Rate.com, the MBA does believe mortgage rates will come down—possibly finishing in the 5% range by the time we’re talking about rates in 2024 and beyond.

The MBA also sees home prices remaining relatively stable. Combined with lower interest rates, this could mean that mortgage lenders look at far more favorable conditions in 2023 than they saw in 2022.

After all, if home prices remain the one constant in this equation, lower mortgage rates mean more qualified home buyers can take out loans. That drives up demand for the loans, which can help mortgage lenders get the mortgages flowing.

Mortgage rates remaining somewhat high compared to 2021 means some challenges still linger. We may not see total mortgages initiated in 2023 rise to 2021 levels. However, increased confidence as mortgage rates cool down could move the needle of home buying in the right direction again. Long-term, it looks like there’s potential for a fuller recovery in 2024.

Making Sense of 2023 and Beyond

What do the trends say about the mortgage industry in 2023?

• Mortgage rates may slowly cool off, with many real estate agents and mortgage lenders alike cautiously optimistic that inflation concerns will disappear throughout 2023. As we saw in the data, lower rates typically mean more mortgages initiated overall, which drives up income for mortgage banks.
• If home prices remain stable, as the MBA predicts, it will mean more favorable conditions for home buyers. This could get home prices moving in a higher direction again.

Just as there’s no crystal ball for the economy, there’s no way of predicting what happens in the mortgage industry. But after a turbulent 2022, the statistics and expectations suggest some light at the end of the tunnel.