In the short term, our interest rate forecast focuses on the Federal Reserve and its attempt to smooth out economic cycles. The Federal Reserve seeks to minimize the production gap (the deviation of GDP from its maximum sustainable level) and, at the same time, to keep inflation low and stable. When the economy overheats (the production gap is positive and inflation is high), like today, the Federal Reserve seeks to raise interest rates to slow growth. This year's interest rate hikes have seemed shocking because interest rates have been very low for a long time.
But the bottom line for homebuyers is that mortgage rates are expected to fall next year, Fratantoni said. The Fed has raised rates by 75 basis points at each of its last three meetings and is expected to raise rates again in November and December. Last week, the Fed recorded a third consecutive increase in interest rates of 75 basis points, raising its target official interest rate range from 3% to 3.25%. The slowdown in real estate activity and rising mortgage rates will slow the rate of growth in home prices, according to the MBA.