February Mortgage Outlook: Rates on the Downslope by End of Month

Mortgage rates could decline in February as the Federal Reserve writes the next chapters of its inflation-busting campaign.

The 30-year fixed-rate mortgage hit its January peak in the first week of the year and fell thereafter. It’s too early to conclude that the 30-year mortgage has already reached its 2023 zenith, but it’s quite possible.

In Freddie Mac’s weekly rate survey, the 30-year mortgage averaged 6.48% in the week ending Jan. 5, then fell the next three weeks in a row, down to 6.13% in the week ending Jan. 26.

“It’s because there’s a better economic outlook,” says Daryl Fairweather, chief economist for Redfin, a real estate brokerage. “It seems that inflation is getting under control and the Fed will slow its rate hikes.”

High inflation, and the Federal Reserve’s efforts to control it, have acted as the main drivers of mortgage rates since the beginning of 2022. In a belated response last spring to fast-rising prices, the Fed undertook an aggressive series of interest-rate increases. The bad news is that mortgage rates soared. The good news is that the inflation rate is falling.

As inflation retreats, mortgage rates have been falling. Now the Federal Reserve is dialing back the severity of its increases.

If mortgage rates fall as expected, they won’t descend in a straight line — there will be daily and weekly ups and downs along the way. Fairweather expects the 30-year mortgage rate “to fall to the 5% range by the end of the year because we expect this current high inflation environment to subside.”

The Mortgage Bankers Association forecasts that the 30-year mortgage will drop consistently this year and average 5.2% in the fourth quarter. Relatedly, the MBA predicts that the inflation rate will fall steadily, too — from an average of 5.6% in the first quarter to 3% in the fourth quarter. 

Lower mortgage rates should stimulate homebuying, said Joel Kan, vice president and deputy chief economist for the MBA. “Homebuying activity remains tepid, but if rates continue to fall and home prices cool further, we expect to see potential buyers come back into the market,” he said in a news release.

NerdWallet’s forecast for January called for mortgage rates to rise in response to stubbornly high inflation and uncertainty about the Fed’s path forward. The forecast wasn’t entirely wrong: Mortgage rates went up at the beginning of the month, then down, then up again. But they went down farther than they went up. January’s average for the 30-year fixed-rate mortgage was 6.3% APR, down from December’s average of 6.38% APR.

An encouraging Consumer Price Index led to the decline in mortgage rates. The December CPI report, released Jan. 12, showed that year-over-year inflation had slowed to 6.5%. But the month-over-month number was even better. It showed that overall prices fell 0.1% in December, led by declines in fuel prices.

Interest rates respond to inflation cues, and the December CPI report sent a message that inflation was in retreat. That led to a modest drop in mortgage rates.