Mortgage rates fell to their lowest level since May 2023 this week, providing a boost to homebuyers and potentially marking a turning point for the struggling housing market.
The 30-year fixed-rate mortgage averaged 6.66% as of January 18, according to mortgage giant Freddie Mac. That’s down from 6.95% the previous week and the lowest level since early May of last year, when rates were above 5%.
What’s driving the drop in rates
Several key factors are contributing to declining mortgage rates:
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Cooling inflation: Inflation is showing signs of easing after hitting 40-year highs in 2022. Consumer prices rose 6.5% in December from a year earlier, down from a peak of 9.1% in June. Slowing inflation reduces pressure on the Federal Reserve to aggressively hike interest rates.
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Weaker economic outlook: Concerns about a potential recession this year have increased, given persistent inflation, geopolitical tensions, and other threats to growth. A weaker economic outlook typically causes investors to shift money into safer assets like bonds, pushing yields down. Mortgage rates tend to follow the yield on the 10-year Treasury note.
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Lower demand: High mortgage rates throughout much of 2022 significantly reduced homebuying demand. With fewer buyers in the market, rates don’t need to rise as much to balance supply and demand.
Impact on housing market
The drop in mortgage rates is welcome news for the housing market after a painful 2022. Here are some potential effects:
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Increased buyer demand: Lower rates make homes more affordable. A recent Fannie Mae survey found nearly one-third of consumers said rates falling below 6% would make them more likely to purchase a home. Housing demand could strengthen in coming months.
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More homeowners look to sell: Falling mortgage rates weaken the “rate lock-in effect” that has kept many homeowners from selling. Some homeowners who locked in historically low rates via refinancing are now more willing to give up those rates and list their homes. That could help ease inventory shortages.
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Smaller price declines: Dropping rates should take some pressure off home prices after double-digit declines last year in many markets. Redfin, for example, predicts annual price declines will shrink from 10% currently to around 4% by year’s end as demand stabilizes.
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Housing market rebalancing: Fannie Mae forecasts lower rates coupled with modest economic growth in 2024 will bring stability and rebalancing to the housing market after last year’s sharp correction in home sales and price growth. They don’t foresee a dramatic rebound but rather a more balanced market.
What comes next
Further mortgage rate declines are likely in coming weeks and months according to various expert forecasts. But the housing market and economy still face significant uncertainty this year.
Mortgage rate predictions
Many experts predict mortgage rates falling further by mid-2024:
- Fannie Mae forecasts 30-year fixed rates averaging 5.8% in Q3 and Q4
- The Mortgage Bankers Association sees rates dropping below 6% by year’s end
- Bank of America analysts predict average rates falling to 5.5% by mid-2024
Rates are returning closer to historical averages after spiking above 7% last year – a level not seen since 2002.
Macroeconomic uncertainties
The path of mortgage rates and the housing market remains highly uncertain and dependent on inflation and the overall economy:
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Inflation needs to show consistent declines towards the Fed’s 2% target. Further inflation flare-ups could warrant more aggressive Fed rate hikes.
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Job market resilience is key – significant layoffs or unemployment spikes would hurt buyer demand and consumer confidence.
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Global factors like oil prices, the war in Ukraine, and China’s economic reopening could all impact US growth and rates.
As one industry expert noted, the housing market is at an “inflection point” amid many crosscurrents – lower rates stimulate demand but consumers also face inflation strains and the economy may teeter near recession.
Winners and losers
The downtrend in mortgage rates produces some clear winners and losers:
Winners
- Homebuyers: More purchasing power and housing affordability
- Refinancers: Opportunity to lower rates on existing mortgages
- Homebuilders: Improved demand outlook after dismal 2022
- Real estate agents: Return of more active housing market
Losers
- Recent home sellers: May have sold too early instead of holding out
- Investors: Reduced incentive for buying homes if price growth slows
- Banks: Lower long-term profit margins on new mortgages
Over the longer term, the return to more balanced and less frenzied housing market conditions would likely qualify as a win for most industry participants. But in the short run, falling mortgage rates shift leverage to buyers at the expense of sellers.
The key questions going forward are whether rates are peaking for this cycle, if they can meaningfully go lower from here, and how quickly and to what degree the housing market bounces back after such an unprecedented boom-to-bust correction. The answers depend greatly on inflation and the economy avoiding worst-case recession scenarios.
To err is human, but AI does it too. Whilst factual data is used in the production of these articles, the content is written entirely by AI. Double check any facts you intend to rely on with another source.
