With the Fed’s rate hike pause on June 14th, questions remain about what will happen next and if mortgage rates will ever return to the “good old days” of 3%, 30-year fixed mortgage rates. Below, Marty Green opines on mortgage rate expectations over the next few years and what a “new normal” might look like.
“Today, rates are very elevated compared to where they were during the pandemic, but historically are in a range that would have been normal before the 2008 financial crisis. But “normal” did get reset during the period between 2008 and the onset of the pandemic. It is unlikely rates will return to the pandemic 2-3% range in the foreseeable future, absent a significant shock to the system.
The Fed will want to keep its Fed Funds Rate in restrictive territory for the remainder of 2023 and into 2024, and the Fed will calibrate any reduction in that rate to keep inflation in check. I expect the Federal Reserve’s monetary policy to remain somewhere between neutral and restrictive for the next 24 months, absent a major economic or other event. Based on those monetary policy projections, a reasonable expectation for mortgage rates would be for rates gradually to drift from their current rate down into a range between 5-6% in the next 12 months.
Mortgage bond rates have had an abnormally large spread between those rates and 10-year treasuries. I expect that to return to a more normal spread as we reach the end of this rate-tightening cycle by the Fed. That more normalized spread should result in mortgage rates being closer to 6% or perhaps a bit under that rate.
Once the Federal Reserve returns to a more neutral monetary policy, which should occur in the next 12 to 24 months, I predict they will ultimately settle in the 4-5% range and stay in that range for an extended period. But major political, economic, health, or other events could cause rates to be much higher or lower than this projection.”