May Mortgage Outlook: Slipping Downward

Mortgage rates have room to fall in May as the end draws near for this cycle of Federal Reserve rate increases.

It’s quite possible that this year’s mortgage rates already peaked in March. They could gradually drop as unemployment rises, companies become less generous with wage increases and inflation subsides.

That’s the viewpoint of nerds who think about this stuff all day so you don’t have to. Specifically, we’re talking about economic forecasters for Fannie Mae, the Mortgage Bankers Association and the National Association of Realtors. All three organizations predict that the average rate on the 30-year fixed-rate mortgage will decline for the rest of this year and through the first quarter of 2024.

“Mortgage rates slipping down to under 6% looks very likely towards the year’s end,” the NAR’s chief economist, Lawrence Yun, wrote in an April blog post.

Notice that he said “year’s end.” Rates are unlikely to plummet in May, but they could glide a little lower. Unless there’s a surprising jump in the inflation rate — possible, but not probable — mortgage rates will probably be lower at the end of May than at the end of April. Then they could continue falling into 2024.

In its April economic and housing outlook, Fannie Mae forecasted a quarter-percentage-point Fed rate increase May 3, then a 0.25% rate cut in the last three months of 2023, “given our ongoing expectation for a modest recession and a significant weakening of the labor market.”

Fannie’s April forecast predicts that the economy will shed jobs for a year and a half, through the end of 2024. It says total economic output will contract beginning this quarter (the second) through the first quarter of 2024. That would make for a yearlong recession.

The Mortgage Bankers Association’s April economic forecast is a little less gloomy than Fannie’s. It implies that the economy will shrink in this quarter and the next, and resume growing in the fourth quarter of the year.

The NAR predicts that the economy will keep growing, accompanied by modest increases in the unemployment rate.

As for the Federal Reserve, the central bank has raised the short-term federal funds rate by 4.75 percentage points since early 2022, and mortgage rates have risen more than 3 percentage points. The Fed is expected to raise the federal funds rate again on May 3, by a quarter of a percentage point. Investors expect it to be the last or next-to-last increase in this round of rate hikes. By the end of April, the expected increase already had been included in mortgage rates.