Interest Rates May Have Peaked, Goldman Sachs Says

No one is predicting a return to the sub-3% mortgage rates seen during the pandemic, but Goldman Sachs is now forecasting that interest rates may be at a peak and could head lower before the end of the year.

The sell-off that boosted yields in the bond markets, pushing mortgage rates this week to the highest level in nearly 23 years, “has been overdone,” the investment bank said in a newsletter sent to clients on Friday. The current yield on 10-year Treasuries would be about a third of a percentage point lower if the bonds were “fairly valued,” Praveen Korapaty, chief interest rates strategist for Goldman Sachs Research, said in the newsletter.

Korapaty expects yields to decline toward the end of this year and in 2024, according to the newsletter. That would put downward pressure on mortgage rates.

Investors in the bond market have been demanding higher yields as they worry about whether the Federal Reserve will be able to tame inflation without causing a recession. About two-thirds of U.S. home loans are packaged into bonds known as mortgage-backed securities, and the decisions made by investors in them are one of the biggest influences on the interest rates homebuyers pay.

In a separate report on Friday, Wells Fargo economists said they expect mortgage rates to peak this quarter and fall throughout 2024, reaching 5.85% in the final three months of next year. 

“Activity in the housing market likely will suffer in coming months” because of the current quarter’s two-decade high in home loan interest rates, they said. 

The average for a 30-year fixed mortgage rose to 7.57% this week, the highest since December 2000, according to Freddie Mac. In mid-August, it was 6.96%.

While mortgage rates will decline, the days of super-cheap rates are over for the foreseeable future, according to the Wells Fargo forecast. The economists predicted that fixed rates likely will average between 5.65% and 5.75% throughout 2025.

In other words, the rates that started with 2s and 3s that borrowers could get during the pandemic, when the Fed was buying mortgage bonds to support the economy, aren’t coming back any time soon. The average U.S. 30-year fixed rate fell to an all-time low of 2.65% in 2021’s first week, according to Freddie Mac data.

“Although we continue to anticipate a gradual decline in mortgage rates over the next several years as the Fed eventually eases monetary policy, financing costs will likely remain elevated compared to recent norms,” the Wells Fargo economists said.