The economic shock hitting the U.S. housing market just lost some punch

February 2, 2023, 8:26 PM UTC

Back in March 2022, Fortune published an article with the headline “An economic shock just hit the housing market.” The notion being that the Fed’s inflation fight, which at the time of publishing had seen the average 30-year fixed mortgage rate jump to 4.5%, would create economic damage in the U.S. housing market.

Of course, that’s exactly what happened: The economic shock spurred by soaring mortgage rates, which topped out at 7.37% in October, pushed the U.S. housing market into a sharp housing recession. The second half of 2022 saw sales of both new and existing homes fall at a pace not seen since 2006.

But if we fast-forward to 2023, the story is again shifting.

In recent weeks, the economic shock caused by spiked mortgage rates has weakened. The reason? As signs of decelerating inflation continue to mount, financial markets are loosening and mortgage rates are falling.

Indeed, on Thursday the average 30-year fixed mortgage rate fell again to 5.99% following Fed Chair Jerome Powell’s “disinflation” comments made one day earlier. That reading marks the first sub 6% mortgage rate since September 12, 2022.

“An improving inflation picture, which led to a smaller increase to the Federal Funds rate, has also led to lower mortgage rates. With the widespread consensus that inflation is on a downward trend, investors sent the yield on the 10-year Treasury lower. Mortgage rates tend to move with the yield on the 10-Year Treasury and the average rate on a 30-year fixed rate mortgage fell from a week ago and is at its lowest level since the second week of September. The drop in rates means that the typical monthly payment for a homebuyer has fallen by $100 since the beginning of January,” wrote Lisa Sturtevant, chief economist at Bright MLS, in a statement published on Thursday.

Let's be clear: The U.S. housing market remains slumped.

While the economic shock spurred by spiked mortgage rates has weakened, it's still very much here. And those elevated mortgage rates, combined with the Pandemic Housing Boom's 41% run-up in U.S. home prices, leaves affordability strained to a historic degree.

Just look at the numbers.

A borrower who took on a $500,000 mortgage in December 2021 at a 3.11% fixed rate would have gotten a monthly principal and interest payment of $2,138. At a 5.99% rate (i.e. the average rate on Thursday), a borrower would get a $2,995 monthly payment on the same size loan.

Where will mortgage rates head from here? Real estate researchers remain divided.

The Mortgage Bankers Association projects that the 30-year fixed mortgage rate will average 5.2% in 2023, and down to 4.4% in 2024. Meanwhile, firms like Goldman Sachs and Moody's Analytics think 30-year fixed mortgage rates will average closer to 6.5% in 2023. (You can find a full rundown of 2023 mortgage rate forecasts here.)


Want to stay updated on the housing slump? Follow me on Twitter at @NewsLambert.

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