Inflation Seems to Have Peaked. Can the Same Be Said for Mortgage Rates?

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It’s a nice thing to consider. 

In June 2022, the Consumer Price Index (CPI), which measures changes in the cost of consumer goods, rose 9.1% on an annual basis. And that summer, a lot of people had to go to the extreme of raiding their savings accounts and racking up debt on their credit cards just to stay afloat.

Since then, annual CPI readings have been considerably lower. And most recently, in January, the CPI only rose 6.4% on an annual basis (“only” being a relative term).

Because CPI readings have been dropping consistently since June, many economists feel that we’re past the peak of inflation, and that things should get better from here on out. But can the same be said for mortgage rates?

Rates are down, but will they stay down?

In October and November of 2022, the average rate on a 30-year mortgage was over 7%. As of early February, it was just over 6%.

Clearly, that’s a nice improvement. But it may be premature to say with certainty that mortgage rates have already peaked and won’t rise again.

The tricky thing about mortgage rates is that they can rise and fall independently, without regard to other economic factors. In 2022, for example, mortgage rates started rising before the Federal Reserve got aggressive with its interest rate hikes. So while those hikes drove up the cost of other types of borrowing, mortgages were already more expensive to sign by the time consumers were impacted in other areas.

Because mortgage rates can be unpredictable, it’s hard to say for sure whether they’ve peaked. But it’s likely that they have, because they’ve dipped considerably since the fall of 2022.

Also, mortgage lenders are aware that home price gains are slowing down, and that buyer demand is starting to wane in light of affordability issues. So if those lenders want to stay in business, they’re going to need to stay competitive. And that means offering up lower interest rates than what they were giving out in the fall of 2022.

How low could mortgage rates go in 2023?

That, too, is hard to say. While there’s a very good chance mortgage rates will fall to the 5% range this year — and possibly even during the first quarter of the year — it’s difficult to predict whether we’ll be seeing sub-5% mortgage rates in the course of 2023.

But those looking to buy a home may want to fixate less so on rates and more so on home prices. Someone who buys a home for $500,000 will never be able to change the sum of money they plunked down on a home purchase. But someone who locks in a mortgage at 6.15% can always refinance that loan to 5.15% if rates fall.

And mortgage rates are bound to fall from where they are today. It could take a while to get back to sub-5% mortgages, but it’s apt to happen eventually. And when it does, those with higher mortgage rates will have a prime opportunity to start reaping some savings.

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