Written by Zahra Tayeb

October 24, 2022

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Mortgage rates could drop to 5.4% by the end of next year, per the Mortgage Bankers Association.

• The forecast comes as MBA expects the Fed will drive the US economy into a recession in the first half of 2023.

• High interest rates to combat inflation will also lead to a drop in home prices in many markets next year, it said.

Mortgage rates could fall to 5.4% by the end of next year as the Federal Reserve's aggressive interest rate hikes will push the US economy into a recession, according to the Mortgage Bankers Association.

"MBA's forecast calls for a recession in the first half of next year, driven by tighter financial conditions, reduced business investment, and slower global growth," said chief economist Mark Frantoni at MBA's annual conference in Nashville, Tennessee, on Sunday.

He said the Fed's efforts to bring inflation down from 40-year highs will lead to a sharp slowdown in the economy, causing a decline in homebuyer demand.

High interest rates mean the cost of borrowing becomes more expensive, eventually suppressing demand over time and thereby mortgage rates.

"Next year will be particularly challenging for the US and global economies. The sharp increase in interest rates this year — a consequence of the Federal Reserve's efforts to slow inflation — will lead to an equally sharp slowdown in the economy, matching the downturn that is happening right now in the housing market," Frantoni said.

Mortgage rates have increased rapidly over the past couple of months with the current average 30-year fixed rate at 6.94%, according to Freddie Mac, hitting a fresh 20-year high.

The effects of the Fed's harsh fight against inflation is already beginning to show in the US housing market after mortgage applications fell to their lowest level since 1997 earlier this month. It's also pulled down home sales, with existing home sales dropping 24% in September.

The slump is only going to get worse, according to Joel Kan, MBA's vice president and deputy chief economist. "The slowdown in housing activity and higher mortgage rates will quickly cut the rate of home-price growth," he said.

He added that national home prices will be roughly flat in 2023 and 2024, but many local markets will see declines.

Top economists like Jeremy Siegel and Paul Krugman have also sounded the alarm on the US housing market, with Siegel forecasting home prices will suffer their second-worst crash since World War II in the next 12 months.