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Freddie: Rapidly Rising Rates, Declining Demand Driving Housing Market Slowdown

Freddie Mac housing forecastMortgage interest rates have increased at the fastest rate since the early 1980s. According to Freddie Mac, the U.S. weekly average 30-year fixed-rate mortgage was 6.94% in the week of Oct. 20. This was up 3.85 percentage points from a year ago according to Freddie Mac’s Primary Mortgage Market Survey.

In the history of the survey, which stretches back to April 1971, mortgage rates have only increased faster in 1980 and 1981. However, in 1980 and 1981, rates averaged 16% and 18%, respectively. Just one year ago, rates were under 3%. This means that while mortgage rates are not as high as they were in the ’80s, they have more than doubled in the past year. Mortgage rates have never doubled in a year before.

The housing market rapidly decelerated as markets absorbed the impact of higher mortgage rates. Home sales have fallen to a forecasted 5.4 million units at a seasonally adjusted annual rate in the third quarter of 2022 from 7 million earlier this year. Home purchase mortgage applications point to continued contraction in home sales activity. Freddie Mac forecasts that home sales activity will bottom at around 5 million units at the end of 2023. Falling from 7 million to 5 million would be a decline of about 30% and put the contraction in home sales in line with other historical periods when interest rates increased.

As housing market activity continues to contract, Freddie Mac predicts that it will lead to a continued increase in the months’ supply of homes available for-sale from historically low levels last year. The loosening of the once incredibly tight for-sale inventory removes the intense upward pressure on home prices of the past two years. While fewer sales are increasing the months’ supply, that is partially offset by fewer new listings as high mortgage rates disincentivize existing homeowners from moving up or downsizing.

Given the house price and home sales forecast, Freddie Mac estimated home purchase mortgage originations to be $1.9 trillion in 2022, slowing to $1.6 trillion in 2023. With mortgage rates expected to remain elevated, refinance activity is estimated to slow with refinance originations declining from $2.8 trillion in 2021 to $747 billion in 2022 and $310 billion in 2023. Overall, Freddie Mac forecasts total originations to decline from the high of $4.8 trillion in 2021 to $2.6 trillion in 2022 and $1.9 trillion in 2023.


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