Challenge for ’23

Mortgage Volumes Expected to Fall 37 Percent

Subdued Outlook for Nation’s Lenders

While interest rates aren’t likely to stay above 7 percent, experts say they will remain high, causing a dramatic drop in demand for mortgages.

As mortgage rates hover around 7 percent and economic conditions suggest an upcoming recession, industry experts say total mortgage volumes could decline in 2023 by as much as 37 percent. 

“Next year will be particularly challenging for the U.S. and global economies,” said Mike Fratantoni, chief economist and senior vice president for research and industry technology at the Mortgage Bankers Association. “The sharp increase in interest rates this year – a consequence of the Federal Reserve’s efforts to slow inflation – will lead to an equally sharp slowdown in the economy, matching the downturn that is happening right now in the housing market.” 

Citing tighter financial conditions, less business investment and a slowdown in global growth, the Mortgage Bankers Association has forecast a recession for the first half of 2023.  

The MBA’s forecast was released at the trade group’s annual convention in October. With a recession likely and the Federal Reserve continuing to take steps to bring down inflation, Fratantoni said in a statement, demand for purchase mortgages will slow down in 2023. Fratantoni also pointed to the challenges homebuyers will face in affording new homes. 

Rates Could Start Retreat 

Freddie Mac’s forecast for 2023, released in October, also sees challenges for homebuyers. 

“Mortgage rates have increased at the fastest rate in four decades, quickly taking the wind out of the sails of the housing market,” Sam Khater, Freddie Mac’s chief economist, said in a statement announcing the forecast. “Caused by stubbornly high inflation and higher mortgage spreads, the rise in rates has created affordability challenges that have forestalled many consumers’ decision to buy a house.”  

The average rate on a 30-year, fixed rate mortgage reached its highest level since April 2002 at 7.08 percent in late October, Freddie Mac reported. The average rate on a 15-year, fixed rate loan was 6.36 percent. 

Freddie Mac has forecast the interest rate on 30-year, fixed rate mortgages to average 6.4 percent in 2023. Back in 2021, that rate averaged 3 percent. The MBA expects the rate to decline each quarter next year, ending the year at 5.4 percent. 

While Fratantoni expects longer-term rates to fall from the current peak levels as the economy slows, the MBA does expect significant volatility in rates because of steps taken by the Fed and other central banks and the markets’ reactions to geopolitical, economic, and monetary policy uncertainties. 

Slowdown Continues 

The MBA and Freddie Mac both expect declines in mortgage originations next year. Freddie Mac has forecast a 37 percent year-over-year decline in total mortgage volumes. Freddie Mac expects $1.9 trillion in mortgage volumes in 2023, with 2022 expected to end with $2.6 trillion in volumes. Total volumes were $4.8 trillion in 2021. 

After $2 trillion in purchase mortgage originations last year, Freddie Mac expects 2022 to end with $1.9 trillion in purchase mortgage originations, followed next year by $1.6 trillion in 2023. Refinance originations could drop to $310 billion in 2023. Originations were $2.8 trillion in 2021, and Freddie Mac expects 2022 to end with $747 billion in refinances. 

The Mortgage Bankers Association, which has a lower forecast for volumes to close out this year, expects about a 10 percent drop in origination levels. The MBA expects total mortgage origination volume of $2.05 trillion in 2023, down from the $2.26 trillion expected in 2022. Purchase originations are forecast to decrease 3 percent to $1.53 trillion next year, while refinance volume is expected to fall by 24 percent to $513 billion. 

Both forecasts also see changes ahead for home prices.  

“The slowdown in housing activity and higher mortgage rates will quickly cut the rate of home-price growth,” Joel Kan, the MBA’s vice president and deputy chief economist, said in a statement released along with the group’s forecast. “MBA expects national home prices will be roughly flat in 2023 and 2024, allowing household incomes some much-needed time to catch up to elevated property values.”  

Kan added that much of the housing demand over the next few years will come from first-time homebuyers, not only because of demographic patterns but also because the lower mortgage rates that existing homeowners currently have will discourage them from moving. The MBA expects housing supply to continue to remain constrained. 

Freddie Mac expects to see inventory levels start to increase.  

“As housing market activity continues to contract, we expect a gradual increase in the supply of homes available for-sale, as compared to historically low levels last year,” Khater said. “The combination of much lower demand and higher supply will cause home prices to decrease during the next year.”