Mortgage rate forecast for August 2023: Don’t expect rates to fall far from here

The economic picture keeps changing, and so does the outlook for mortgage rates.

As recently as June, many experts expected the U.S. economy to fall into recession this year, and mortgage rates to dip back into the 5 percent range.

The economic reality has played out much differently. Mortgage rates are still close to 7 percent, and with the Federal Reserve resuming rate hikes at its July 26 meeting, housing economists expect them to hold steady for now — that is, rates might move up or down slightly, but they’re unlikely to fall substantially.

“I do not see much change from the current 6.5 percent to 7 percent range in August,” says Lawrence Yun, chief economist at the National Association of Realtors.

The primary driver of mortgage rates this month: inflation, and anticipation of how the central bank will react to the price picture.

What happened to mortgage rates last month

Mortgage rates were quite volatile in 2022, surging past 7 percent far faster than anyone predicted. They calmed some in 2023, with the average rate on a 30-year fixed loan at 6.95 percent as of July 5, according to Bankrate’s weekly national survey of lenders. Rates bounced around a bit throughout the month but barely changed overall, reaching 6.98 percent in the final survey taken in July.

Not long ago, mortgage experts were calling for rates to fall all the way to the low-5 percent range this year. Instead, the resilient economy means mortgage rates have held strong.

“Mortgage rates are remaining above levels we anticipated earlier this year as inflation pressure has persisted and consumer spending remains robust,” says Selma Hepp, chief economist at CoreLogic, a real estate data and analytics firm.

The driver rate watchers are looking at now

The major factor moving mortgage rates is inflation, and what the Federal Reserve will do at its September meeting.

In June, the official inflation rate cooled to 3 percent. That was well below the 2022 peak of 9.1 percent, but it’s still above the Fed’s official target of 2 percent. As a result, the Fed resumed rate increases at its meeting in July.

“If inflation data show that price pressures are easing, particularly at the core level, that will keep a lid on mortgage rates,” says Greg McBride, Bankrate’s chief financial analyst. “But without that, there just isn’t much of a catalyst for any meaningful pullback in mortgage rates when the economy is doing well enough to warrant more Fed rate hikes.”

While the Fed doesn’t directly control mortgage rates, its moves set the overall tone for borrowing costs. In his July 26 news conference, Fed Chairman Jerome Powell said further rate increases are a possibility. “We’re prepared to further tighten if that is appropriate,” Powell told reporters.

Like Powell, Yun will pay close attention to the Consumer Price Index (CPI) reports scheduled for release in early August and early September.

“The next Fed meeting occurs after two months of CPI figures,” says Yun. “Much calmer inflation will stop the Fed from raising rates, with hints of a rate cut next year.”

Yun sees mortgage rates falling to 6 percent by the end of 2023 — a view shared by Bob Broeksmit, president and CEO of the Mortgage Bankers Association.

“Rates will remain volatile in the coming months but will fall to around 6 percent by the end of this year,” says Broeksmit.

Another wildcard is the overall angst among investors and lenders — uncertainty that is showing up in the gap between 30-year mortgage rates and their closest proxy, the 10-year Treasury yield.

This interval, known to economists as “the spread,” typically runs between 1.5 and 2 percentage points. If the 10-year yield sits at 4 percent, for example, the 30-year fixed mortgage rate should track close to 6 percent.

However, the spread has jumped to more than 3 percentage points — the highest level since the scary days of 2009, according to Bankrate research.

What the rate picture means for homebuyers, sellers

While the housing market has cooled in recent months, a crash doesn’t seem imminent.

Instead, home prices have held steady as demand for properties continues to outpace the supply of homes for sale. The National Association of Realtors says the median home price in June topped $410,000, the second-highest monthly reading on record.

That’s good news for sellers, not so good for buyers. Buyers have little choice but to accept the market’s new reality. Mortgage rates are unlikely to fall, says Erin Sykes, chief economist at Nest Seekers International, a real estate brokerage.

“I expect mortgage rates to more or less stay stable though the rest of the year,” says Sykes. “Watching rates on a daily basis is like waiting for a pot to boil. Small adjustments in rates should not affect your motivation to purchase a home.”