Mortgage Rates Drop For First Time In 6 Weeks—But Housing Market Downturn Could Last Several Years, Wells Fargo Warns

The average rate on a 30-year fixed mortgage ticked down 4 basis points to 6.66% last week, falling for the first time in six weeks as a result of ongoing economic uncertainty, Freddie Mac reported Thursday morning.

Despite the decline, the mortgage giant noted that rates remain “quite high,” compared to when they were at less than 3% one year ago—contributing to rising housing costs that have driven up the average monthly mortgage payment by $840, or 56%, over the past year.

In a Wednesday note, Wells Fargo economist Charlie Dougherty pointed out the rising mortgage costs are mostly attributable to the Fed’s aggressive tightening campaign, and that though the central bank doesn’t directly control mortgage rates, it does influence ten-year Treasury yields that sway borrowing costs.

The “fiercely hawkish” Fed is one reason Dougherty expects mortgage rates will remain above 6%—still double what they were one year ago—through the fourth quarter of 2023, and even if inflation subsides enough to allow the Fed to tone down its interest rate hikes, the economist still believes mortgage rates will likely remain above 5% throughout 2024.

Though underlying demand remains strong, higher financing costs are likely to “weigh heavily” on housing activity over the next several years, especially as unemployment rises to help achieve the Fed’s inflation goals, the economist warns.

As a result, Wells Fargo projects existing home sales will fall to 4.7 million in 2023 (on an annualized basis), down from a peak of nearly 6.5 million this year; it also says housing supply faces a similarly “daunting” outlook since many home buyers refinanced at rates just over 5% last year, making them unlikely to sell their homes while rates remain elevated.