The housing market, both in Silicon Valley and around the nation, was hitting an all-time high in pricing and demand at the end of 2021. Yet this frenzied housing market, both locally and nationally, experienced a rapid reversal and conditions have quickly pivoted to becoming a buyers’ market.

This change was precipitated in large part due to rapidly rising mortgage rates. Many articles have discussed how the average 30-year conforming mortgage jumped up from 3.11% at the end of 2021 to 5.22% now. Neither mortgage rates nor the federal funds rate have risen this quickly since the 1980s.

This rapid rise has done more to cool buyers’ interest than the declines in the stock market. Home buyers generally care more about the amount of their monthly mortgage payment than they do the exact price of their home. The reality is, how much house you can afford is directly related to your monthly mortgage payment. While home prices generally fluctuate by several percent between a sellers’ or buyers’ market, there can be a much greater variance in mortgage rates. 

In recent weeks, mortgage rates have somewhat declined from their new peaks and these declining rates have helped the housing market regain some momentum. The question is whether mortgages will likely increase or decrease going forward, as their trajectory impacts the housing market.

I, along with several economists, actually feel that mortgage rates will decline in 2023. This statement may sound surprising given that the Federal Reserve will continue raising the Federal Funds rate throughout the rest of the year. The Federal Funds rate, currently at 2.5%, is the rate that banks charge themselves when borrowing money from each other. The Federal Funds rate also determines the prime rate, and if the Federal Funds rate goes up, so too does the interest rate for credit cards and car loans.  

Conversely, mortgage rates are market-driven and are determined by the bond market. Expectations of a rising Federal Funds rate have been incorporated in bond markets for several months now and when the Federal Reserve does a planned increase, that generally has no impact on pricing for the 10-year bond.

Additionally, in times of economic uncertainty such as we are experiencing now, many investors take funds out of the speculative and volatile stock market and transfer these funds into the bond market, bringing bond yields down. I feel that the mortgage rates spiked up more than were warranted at the start of the year, and the recent decline in mortgage rates is due to the 10-year bond’s return dropping from over 3.49% in June to 2.89% as of the writing of this article. This drop resulted in a commensurate drop in mortgage rates over the last two months. 

Most economists expect inflation to ease and the Fed’s rate increases to end as it pivots to easing monetary policy in 2023 as the need to sustain economic growth becomes paramount. While I project the Federal Funds rate to fall from a peak of 3.5% at the start of 2023 to 1.5%, I feel that market-driven mortgage rates will continue to decline, or stay stable, for the next year, at which time they may go up as the economic recovery may be in full swing by then.

Given that this dip presents a rare opportunity to purchase a Silicon Valley home for hundreds of thousands below what a similar home would sell for in the spring, I recommend that clients purchase a home now at a discounted price, use an adjustable-rate mortgage for 7 years, and then refinance to a 30-year mortgage when rates decline in the future.  

Additionally, through my sole focus on buyers, I always know what bank offers the best mortgage rates each week. These rates are much lower than general market rates, as I focus on the most aggressive lenders with the best rates, and I share these referrals with my clients.  To get these referrals, please reach out to me at Ken@DeLeonRealty.com or 650.543.8501. Some of the exceptional rates I can steer you towards include:

7-year - 3.20% 

10-year - 3.60% 

15-year - 3.65% 

30-year - 3.95%