Feds' latest rate hike has experts pondering if mortgage rates will drop in 'another year or two'

  • Housing experts don't see a clear end for rising mortgage interest rates.
  • "It may be another year or two before that happens," national realtors' group top economist says.
  • Fed Chair Powell thinks housing market has "weakened significantly," due to higher mortgage rates.

As the Federal Reserve added another interest rate hike sending mortgage rates soaring well above 7%, housing experts are pondering what's next for the market that's showing some instability.

"This process is going to take some time, everything is not going to magically change in a minute," Bess Freedman, CEO of real estate firm Brown Harris Stevens in New York City told USA TODAY shortly after the Fed's increase.

In anticipation, "the mortgage market has already priced in the latest Fed move. Still, mortgage rates are near 20-year highs, and that hurts home buyers," Lawrence Yun, chief economist for the National Association of Realtors said in a statement. "Once inflation is contained, mortgage rates will start to drift lower. It may be another year or two before that happens." 

Dan Richards, executive vice president of mortgage for Flyhomes, a startup that helps qualified buyers get into homes by providing all-cash offers to sellers, agrees with Yun that mortgage interest rates likely won't fall for some time. 

"If Powell says they’re not changing their plan, rates will likely stay where they are," Richards said.

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Powell: housing market has 'weakened significantly'

The experts' commentary comes as the Fed hiked its benchmark rate by 75 basis points for the fourth straight time. As a result, "activity in the housing sector has weakened significantly, largely reflecting higher mortgage rates," Powell said during a press conference last week.

Powell furthered the Fed's stance that mortgage rates were actually lowering home prices in certain markets without mentioning specifics. However, George Ratiu, manager of economic research for, tells USA TODAY that some of its top 50 market cities including New Orleans, Pittsburgh and Birmingham, Ala., are seeing home price declines.

"What this tells me is that demand has pulled back really sharply," Ratiu said. "As a result, we are seeing inventory continue to slightly grow as more homes are sitting on the market longer." 

Annual home price growth is expected to slow to 10% by December, half of the peak 20% spike recorded in April, according to the latest CoreLogic’s Home Price Index forecast. 

And investment firms Goldman Sachs, Moody's Analytics and Morgan Stanley have said they expect home prices to drop between 5% and 10% in the next year. 

"The housing market was very overheated for the couple of years after the pandemic as demand increased and rates were low," Powell told reporters last week. "We all know the stories of how overheated the housing market was, prices going up. Many, many bidders and no conditions, that kind of thing.

"So the housing market needs to get back into a balance between supply and demand," Powell concluded.

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Home buyers have hit a 'financial ceiling'

Finding that delicate balance between low housing supply and major demand will remain the challenge for both the Fed and the housing industry Ratiu said. 

"While prices will drop in certain metros, whether migration or seasonal, in other markets, there’s still a strong demand and willingness to buy a home," Ratiu added, citing the Northeast and specifically the Boston metro area among the hottest markets in the U.S.

Also, Ratiu and Nadia Evangelou, a senior economist and director of forecasting for the National Association of Realtors, both say home buyers are paying about $1,000 more in mortgage payments than they were a year ago.

For example, Ratiu said a home priced at $427,000, the interest rate a year ago would have a $1,400 mortgage payment with a 3% interest rate and a 20% down payment. At 5%, the mortgage becomes $1,800. But at the current 7%, the mortgage balloons to around $2,300, Ratiu said. 

"And that doesn't include the home insurance or HOA (homeowners association) fees," Ratiu said. "Buyers have hit a financial ceiling in terms of the way homes are priced now."

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Mortgage interest rates dip not 'likely until 2024'

Powell's sentiments were echoed by Federal Reserve Board Vice Chair Lael Brainard in the Fed's latest financial stability report.

"Today's environment of rapid synchronous monetary policy tightening, elevated inflation, and high uncertainty associated with the global pandemic and the war raises the risk that a shock could lead to the amplification of vulnerabilities, for instance, due to strained liquidity in core financial markets or hidden leverage," Brainard said.

As a result of the Fed's hikes, real estate markets already impacted by higher mortgage interest rates for several months will unlikely see relief, said Ruben Gonzalez, chief economist at Keller Williams, a property tech real estate company. 

"As the Fed continues to combat inflation, the housing market will continue to slow as one of the most interest rate-sensitive industries. Homeowners’ equity levels are high because of the rapid appreciation, and mortgage default rates remain near all-time lows as markets cool," Gonzalez said. "We're unlikely to see mortgage rates move down until the second half of next year but more likely not until 2024." 

Andrzej Skiba, head of U.S. Fixed Income at RBC Global Asset Management, said Powell exhibited a "hawkish" stance that makes him think the Fed believes "it is very premature" to think about pausing rates.

"So the Fed cavalry might not be coming to the rescue in 2023," Skiba said. "It comes as no surprise."

Robert Dietz, the chief economist for the National Association of Home Builders, predicts the Fed will ease up on interest rates no later than 2024 claiming the 2023 market until then "will be weak."

However, Ratiu of, said, "I’m a bit more nuanced as I do see mortgage interest rates plateauing in the next six months, Whether they plateau at 7% or 7.5%."

Ratiu said Powell is hedging his bets that if the Feds can get "higher borrowing costs to blunt consumers' ability to spend more," inflation will decline. The current inflation rate is 8.2%, according to the U.S. Bureau of Labor Statistics. The next update is scheduled for Thursday. 

"If that bet proves correct, inflation will probably be more moderate and can take the pressure off mortgage increase rate increases," Ratiu said. "Not saying it's ideal, but it will be retreating from this mad dash where the speed of mortgage rates went from 3% in January to more than 7% nine months later and has handicapped the housing market."