Housing Market Decoded: Have mortgage rates peaked? 

Decisions in residential real estate are often based on market data — sometimes conflicting, often confusing. Housing Market Decoded, authored by economists and other market experts, helps put the data in context so you can make sense of the numbers.

Mortgage rates have taken housing markets on a roller coaster ride over the past three years, and everyone is looking for the ride to end. As we start the new year, there are early signals that rates may have begun to find a balance, offering some potential relief for buyers.

The Zillow Economic Research team's role is to provide data and insights that help agents, buyers and sellers make sense of what is happening in the market. What we've seen (and I'm sure many of you have experienced) over the past few years is that mortgage rate fluctuations have weighed heavily on prospective home buyers.

When the average mortgage rate was hovering near or below 3% mid-pandemic, the decision to buy a home was much more clear-cut than ever before for those who could afford it — and could outcompete a surge of other buyers. That same decision suddenly wasn't as clear when mortgage rates rose past 5% in April 2022, in a matter of only four months, increasing the monthly mortgage payment for the average homeowner by $400 for a 30-year mortgage on a typical home. 

When mortgage rates topped 7% in November, buyers and sellers froze. With rates that high, buyers found that affordability was challenging — housing markets almost across the board started to slow down even more. Today's sellers have a huge incentive to stay put. More than 90% of homeowners have a mortgage rate near or below 3%. With a majority of those homeowners holding a low, fixed-interest rate, delaying upgrading or downsizing makes sense for many of them until the normal course of life encourages households to move on.

You would think that as mortgage costs rise, buyers would have more motivation to do their research and shop around for the best rate. However, a recent Zillow Home Loans survey found that buyers spend less time shopping for their mortgage than they do for their major appliances, despite the mortgage rate being so critical to their monthly costs. Agents can help buyers seeking financing by encouraging them to connect with a lender who can give them a clear picture of what they can afford, explain the tradeoffs of buying points, and help find the best rate possible for them. Working with a lender to get pre-approved is also critical to compete against other buyers.

As the market continues to cool, falling mortgage rates — not falling prices — will likely have the greatest impact on improving affordability. 

Here's the good news: Mortgage rates may have reached their peak — in this rebalancing cycle at least. All standard measures of inflation came in below what was expected at the end of last year. The consumer price index, though a volatile headline maker, was below the Federal Reserve's long-run target of 2%. These signals led the Fed to ease its campaign of aggressive rate hikes, which helped bring mortgage interest rates down.

While mortgage rates are important, there's also a bigger picture to consider. People who are ready and able to buy now might not benefit from waiting. Buyers kept back by intense competition in the early pandemic demand surge will benefit from less competition and more time to consider available inventory in the market right now. 

What buyers cannot expect is less competition and lower mortgage rates in the future. That is because this slowdown is all about discouraged buyers temporarily pulling back because of high mortgage rates. Long-term demand for homes from millennials and Gen Z hasn't gone anywhere and it is actually expected to peak in 2023. If mortgage rates fall or prices adjust quickly, many first-time buyers will renew their interest in beginning their home-buying journey, and steady sales will return.

In the meantime, expert local agents are the best resources for helping clients navigate local market changes, ensuring that buyers and sellers understand the current market and what's to come. Prices are slowing, but in certain areas, they are coming down faster. Some homes still sell quickly, other houses are staying on the market longer — an average of 21 days before going pending for 2022 versus only seven days at the height of the pandemic in 2021 and more than a month before the pandemic.

Whenever things are changing this quickly, buyers and sellers should seek out experts they can trust like a local experienced real estate agent and a knowledgeable lender. The Zillow Economic Research and Zillow Home Loans teams are available to help. Our monthly reports, weekly snapshots and other valuable insights make it easy for agents to quickly get up to speed and keep their pulse on the market, so they can focus on getting their clients into their next home.

Dr. Skylar Olsen is a foundational member of Zillow's Economic Research Team. This dedicated group provides unbiased data and analyses to inform policymakers, journalists, academics and consumers about the housing market and mortgages.