The federal funds rate is now at its highest level in 15 years. Last week Federal Reserve Chair Jerome Powell, along with the Federal Open Market Committee, raised the overnight lending rate by 50-basis points putting it in a range of 4.25% to 4.50%. This was a slight pull back from the four previous 75-basis point hikes implemented by the FOMC in an effort to curb inflation. However, this does not signal that the Fed is going to decrease rates anytime soon.

The FOMC expects rates will eventually move just over 5% to 5.1% before the quantitative tightening cycle is over. Committee members also forecast there would be no rate reductions until 2024. The yield on the 10-year Treasury note, which has been declining over the last few weeks, dipped even further the morning after the Fed's announcement, slipping just below 3.5%. Mortgage rates tend to follow the trajectory of the 10-year Treasury note yield. It's likely that the Fed's recent rate hike will also create more downward pressure on mortgage interest rates as the economy weakens and heads toward a potential recession. 

The 50-basis point hike was widely expected by investors but the language that comes with the announcement is what helps dictate their next moves. Investors were bullish over the last two weeks with important inflation data, like the consumer price index, coming in much cooler than expected. That is a signal that the Fed's QT measures are working to slow down the economy. However, the Fed's hawkish language about continued hikes for the next 12 months soured the excitement, leading to all three indexes trading down directly after the announcement.

Have we seen the peak of mortgage rates?

The average rate on a 30-year fixed rate mortgage declined for the fifth straight week, according to Freddie Mac's weekly survey. The average came in at 6.31%, down just slightly from 6.33% the week prior. The struggle for many would-be homebuyers, or would-be refinancers, is that 6.31% is still more than 3% higher than rates were on average just a year ago. Furthermore, home prices are still significantly elevated which is stifling demand due to high cost of financing. 

Freddie Mac economists noted, "Mortgage rates continued their downward trajectory this week, as softer inflation data and a modest shift in the Federal Reserve's monetary policy reverberated through the economy. The good news for the housing market is that recent declines in rates have led to a stabilization in purchase demand. The bad news is that demand remains very weak in the face of affordability hurdles that are still quite high."

The National Association of Realtors (NAR) addressed inventory and sales in its year-end Real Estate Forecast Summit and predicts that existing home sales will drop by nearly 7% from 2022-2023, hitting 4.78 million sales. The NAR also expects median home prices to stay relatively flat next year, coming in around $384,500.

The NAR's chief economist Lawrence Yun also believes mortgage rates won't go any higher, but don't get too excited about a sharp decline anytime soon. "I think the peak has already occurred and we are on a downward path, but we will not go back to 3% mortgage rates," said Yun.  "I think the mortgage rate could go down even further because there is a gap between the 30-year fixed rate mortgage and the 10-year Treasury yield and inevitably the abnormal high spread will begin to narrow, which means that there is even further room for mortgage rates to decline in the upcoming months as their spread narrows."

*The next Market Update will be released Jan. 6, 2023 due to the upcoming Christmas and New Year's holidays.