I want to give you my prediction of where interest rates are going for 2023. It's the number one question people ask us, and they wonder about when they buy their home: What interest rate am I getting, and what do interest rates look like? I don't need to tell you that interest rates have been on a wild ride—more than we ever expected they would, in 2022. They started the year at 3% in August, went up to 6%, back to 5%, up to 7%, and then ended the year somewhere in the ballpark of the mid-6% range—a wild ride. I've never seen it in my 15 years before. I do believe the skies will be a little bit brighter going into 2023. Starting the year, we saw interest rates decrease by almost 1%. They came down just a little bit below 6% for many loan programs at the beginning of 2023.
To understand interest rates, you have to know what they are. A mortgage is essentially a bond, which is a long-term investment instrument. If you think about it, if you took a mortgage out for $200,000 at 6%, you would be paying the bank back $200,000 plus 6% over 30 years. That is the exact same as a bond. Two factors affect bonds. Number one is inflation, and number two is the recessionary fears we have in the economy. In terms of inflation, interest rates moved so much last year because inflation went from a very modest level at the beginning of 2022 to almost 7% in the middle of 2022.
“I don't need to tell you that interest rates have been on a wild ride.“
From a bank's perspective, if they have committed a loan to you for $200,00 at 6% and let's say they're getting $1,200 over the next 30 years, if inflation starts going up, that means the bank has to pay their employees more, their electric more, more for their rent—all of their other expenses increase and go up because of inflation. Yet they're still receiving that same $1,200 over the next 30 years. When there's a concern of inflation, increasing mortgage rates always follow suit because banks know they have to receive more money to account for future expenses. That's why mortgage rates are so closely tied to inflation.
The good news is the worst of inflation is behind us. Over the last five months, we've been seeing it coming down every month, and the core inflation is now a little bit below 6%. I believe that over the next three to four months, we will see inflation come from the 5.5% range where it is now, back down to the 2% or 3% level. I think there is good reason to believe that. And once we see inflation at 2% or 3% at the end of the second quarter of this year, sometime in June, interest rates are going to follow suit. I believe the 30-year rate will settle somewhere between 4.8% and 5.5%.
Hopefully, you found this interesting and informative. Remember, if you have any questions about this topic or mortgages in general, please feel free to call or email us. We would be delighted to serve as a resource for all of your mortgage-related needs.