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Mortgage rates: It may be 'a little bit easier' to find a home in 2023, economist says

Mortgage Bankers Association Chief Economist & SVP, Research & Industry Technology Mike Fratantoni joins Yahoo Finance Live to discuss mortgage rates hitting a 20-year high and the overall state of the housing sector.

Video transcript

DAVE BRIGGS: The last time mortgage rates were north of 7%, the first Spider-Man movie had just debuted in theaters. Eight films and three Spider Men later, the 30-year fixed is back above 7 to 7.08%, up from 6.94 last week and 3.14% just a year ago. That's according to Freddie Mac. Let's talk about the housing picture with Mike Fratantoni, chief economist and senior vise president at the Mortgage Bankers Association. Good to see you, sir. So where are these rates headed? Will we see 8 before we see 6?

MIKE FRATANTONI: It's a good question. And I would say one of the prime features of the market today is just an incredibly high level of volatility rates are bouncing around like crazy. So if you look at the 10-year Treasury today, it's down about 40 basis points from a recent high. And that tends to be a benchmark that mortgage rates track pretty closely. So day to day, it's unclear where we're headed. But I think over the next six, 12 months, we're likely to see mortgage rates lower than we see them today.

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SEANA SMITH: How much longer, Mike, do you think?

MIKE FRATANTONI: So our forecast is probably back to about a 5 and 1/2% rate. So I don't see any way we get down to the 3% rate we had in 2020 and 2021. But 7% is really unsustainably high as well. And we think there's two forces out there. The Fed is pushing up short-term rates to try to combat inflation. But on the other hand, we're forecasting a recession for next year. And there's a lot of global weakness that's going to be putting some downward pressure on longer term rates. And that'll really be helping to bring mortgage rates back down to a more typical longer rate.

DAVE BRIGGS: So how would you characterize the impact of these higher rates in terms of how they have hurt the housing sector? And push towards '23. What will happen to home values?

MIKE FRATANTONI: Yeah. So really beginning this spring, sort of late May, June, it was just sticker shock. We saw borrowers that were looking to buy a home. Their mortgage payment was $400 or $500 more than when they first sat down to come up with a budget for that home purchase. So people just backed away. But I think as we get into '23, again, we have the challenges coming from a weaker economy and likely a rising unemployment rate, but then the benefits of, we think, mortgage rates drifting lower.

And one of the biggest challenges homebuyers faced the last couple of years was just the lack of inventory on the market. We think it'll be a little bit easier to find a home in 2023. There will probably be fewer situations of that multiple bids above list price. And I think for that-- particularly that first-time buyer, it'll be really a more thoughtful exercise. You won't have to make the offer the minute you see the home. You might actually have a little time to think about it.

But from a housing market and mortgage market perspective, it will be a slower market in '23 than we had in 2022. We think mortgage originations are going to fall about 9% in 2023, compared to what we saw this year. And this year, volume is about half what it was last year.

SEANA SMITH: Wow, a huge drop expected there into 2023. So given that, then, we've already seen a number of layoffs within the mortgage industry. I guess, how do you see that playing out, then, if you're expecting it to slow down even further next year? How many cuts could we potentially be looking at?

MIKE FRATANTONI: Yeah, so in the mortgage industry, there's the two types of loans getting made, right? There's refinances, which are entirely rate dependent. Those have just shut off this year. We're down more than 85% in terms of refinance loans compared to last year at this time. Purchase loans have also dropped again due to the sticker shock phenomenon.

But we have an estimate that peak to trough, with the peak being in late '21, the trough being in early '23, the industry is probably going to lose 25% to 30% of employment. And we're probably about 1/3 of the way there so far, so you're still going to see additional layoffs and some consolidation in the sector.

DAVE BRIGGS: And that is part of the Fed goal, of course, is not just bringing down home values, but of course, helping out with the labor market as well. There are many that fear the housing sector could be the one thing to break because it is the first one to feel the pain. How concerned are you?

MIKE FRATANTONI: Yeah, so you look back at business cycles over the past several decades. You regularly would see the housing market weaken first when rates first went up. But by the other end of the token, we expect the housing market's going to rebound first as well. So I think the recession will probably be in the first half of '23. But as rates drop, buyers reenter the market, we expect we're going to see housing lead the economy out of recession as we get into the second half of '23.

SEANA SMITH: So then, Mike, speaking to that, I guess comparing the situation that we're in right now to what we saw back in 2006, 2007, 2008-- and I bring that up because of the delinquency rates. And I know it's something that you are tracking very closely, but where we are today, it's not too far from that record low that we set in May. So what does this tell you just about the comparisons that some people are drawing to today, to what we saw about 15 years ago?

MIKE FRATANTONI: Man, I would say it's night and day, right? You know, 2006, 2007, you had a housing boom like we'd never seen before. You saw very loose mortgage credit. And you saw really an abundant supply of homes on the market. Coming into this, housing supply was really quite tight. Credit criteria are extremely tight, both because of what lenders are doing and then really some of the regulations that were put in post Great Financial Crisis have really locked in really traditional underwriting and sound credit behavior.

So I think the housing market is in relatively good shape. And again, the undersupply is a real critical factor here that is going to prevent home prices from really dropping the way we did see during the Great Financial Crisis. And I think it's also going to lead to a rebound as we get past this period of weakness and as mortgage rates return to more typical levels.

SEANA SMITH: Yeah, certainly a very different situation what we were looking at in the last recession. All right, Mike Fratantoni, great to have you. Thanks so much for joining us.