MORTGAGE INTEREST RATES

JUSTIN MESSER. Chief Executive Officer. Prosperity Home Mortgage

2022 started with a bang, the 1.31% jump in rates over the first quarter was the fastest 3-month increase since 1994. The trend continued throughout 2022 and with it brought an early chill to the housing market. The total increase in interest rates in 2022 ended at a shocking 3.2%, the largest annual increase in 50 years.

Entering 2023, we do see reasons for optimism. Last year we forecast that inflation would be the data point that would rule the path of mortgage rates and that continues to be the most important theme into 2023. It also appears that inflation may have peaked in June 2022 (at 9.1%) and has been trending down monthly as a result of aggressive rate hikes from the Federal Reserve and the easing of supply chain issues. As of January 2023, inflation still sits at an elevated level of 6.45% and we expect continued action from the Federal Reserve. While the Federal Reserve rates hikes are important, they do not directly correlate to the 30-year fixed rate mortgage. Mortgage rates are more directly controlled by the direction of inflation, and we believe that inflation expectations will continue to trend downwards, the basis for our forecast that mortgage rates will drop from 6.375% today to 5.5% or lower. Prominent market forecasts point to this direction:

Reduced interest rates are vital to the housing market and overall economy in 2023 as we need to improve both affordability and available inventory. If mortgage rates can dip to 5.5% or lower, we would see a 10% increase in buyer purchasing power and, perhaps more importantly, more homeowners would be willing to sell without the fear of losing that 3.0% interest rate they have on their home today.

Home Inventory

Challenges of limited inventory rolled over from 2021 into 2022. At the start of 2022 homes were receiving multiple offers, contingencies were being waved, and often the sold price was above asking. Because the market had been moving at a rapid pace for an extended period, even as interest rates started to rise, sales activity maintained. For three of the first four months of 2022, more homes sold than hit the market, resulting in extremely limited inventory. In the first half of the year, inventory levels were less than 1-month supply.

In the second half of 2022, consecutive rate rises and the potential of a 7% mortgage rate started to have an impact, and with less buyers in the market inventory levels gradually increased. At the end of 2022, average inventory levels had reached 3.5 months for sold and pended properties. While this is a substantial shift from 1-month at the start of the year, it is in-line with historical levels; across all of 2018 and 2019 (pre-pandemic) inventory averaged 3-months’ supply. The chart below illustrates the inverse relationship of price and inventory across 2022.

Housing inventory is expected to remain tight in 2023, with housing starts below historical averages and fewer homeowners willing to sell, due to the increased cost of new mortgages. The rate of new construction of single-family homes is expected to be low if sales move slower and builders focus on moving existing inventory. These housing supply challenges will help to maintain home prices particularly in the Atlanta market which continues to experience net migration growth.

National And Local Economy

There remains varying opinion about whether the country will experience a recession in 2023. Many indicate that even if we do enter a recession, it will be a relatively mild compared to anything experienced previously.

One of the reasons the market is such a challenge to predict is the strength of employment; during 2022, the economy added 4.8 million jobs. Early signs in 2023 show a continuation of a strong labor market with the January 2023 unemployment rate reaching a 53-year-low of 3.4%. Georgia’s labor market is even stronger than the national average; in the last six months of 2022, Georgia’s unemployment rate sat between 2.8% - 3%.

Georgia is expected to continue to outperform the rest of the nation in major economic indicators through 2023. According to Selig Center for Economic Growth, Georgia’s GDP will increase while the U.S. GDP experiences moderate declines, unemployment levels will remain below national averages and personal income growth in the state will exceed inflation.

“In 2023, the pattern of Georgia outperforming the U.S. will continue, thanks to the buildout of many projects in Georgia’s economic development pipeline; competitive economic incentives that help refill that pipeline; more leverage than most states from higher new vehicle sales; strong performance of Georgia’s ports; solid prospects for military bases; and demographic trends that underpin economic growth.” (THE 2023 GEORGIA ECONOMIC OUTLOOK, Selig Center for Economic Growth)