Mortgage rates have fallen significantly over the past week, reaching the lowest levels since last spring. As of Thursday, January 19th, the average rate on a 30-year fixed mortgage hit 6.6%, according to data from Freddie Mac. This marks an over 0.5 percentage point drop from rates just a few weeks ago. This sudden decline is driving increased mortgage demand and providing some optimism about the housing market in 2024.
What’s Behind the Rate Drop
Several key factors are contributing to declining mortgage rates:
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Slowing Inflation – Inflationary pressure has eased over the past couple months. The December 2023 Consumer Price Index report showed inflation rising 6.5% over the last 12 months, down from 7.1% in November. Slowing inflation reduces pressure on the Federal Reserve to aggressively hike interest rates. Investors are betting rates have peaked, leading to a drop in yields on 10-year Treasury notes, which mortgage rates tend to follow.
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Weakening Economic Growth Outlook – Fears of an economic recession this year have dampened. Major banks and organizations like Fannie Mae have softened their recession forecasts. A weaker growth outlook gives the Fed room to pause rate hikes or even cut rates to stoke growth. This is contributing to declines in Treasury yields and mortgage rates.
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Increased Mortgage Backed Securities (MBS) Buying – As mortgage rates decline, government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac have ramped up purchases of mortgage-backed securities (MBS). Increased demand for these bonds puts further downward pressure on MBS yields and mortgage interest rates.
Mortgage Rate Forecasts
While mortgage rates remain high from a historical perspective, analysts widely expect further declines this year:
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Fannie Mae economists predict the 30-year fixed rate mortgage dropping below 6% by the end of 2024.
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Zillow economists forecast rates falling to 5.1% to 5.5% by early 2025 in their latest housing market outlook.
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The Mortgage Bankers Association also sees rates dipping under 6% this year in a new forecast update.
| Forecaster | 30-Year Fixed Mortgage Rate Prediction |
|---|---|
| Fannie Mae | Under 6% by end of 2024 |
| Mortgage Bankers Association | Under 6% in 2024 |
| Zillow | 5.1% – 5.5% by early 2025 |
With inflation showing signs of cooling and recession fears easing, most experts believe the Fed is approaching the end of this rapid rate hiking cycle. This should place consistent downward pressure on mortgage rates through 2024.
Mortgage Application Volume Jumps
In response to the recent rate drop, mortgage application volume saw a dramatic spike last week. According to data from the Mortgage Bankers Association, total mortgage application volume rose 10% for the week ending January 13th compared to the previous week. Further drops in rates this week have accelerated demand even more.
Both refinance and home purchase applications drove last week’s growth. With rates falling under 7% for the first time since last April, many homeowners are incentivized to refinance and lock in lower monthly payments. The refinance share of activity increased to 37.5% of total applications, up from 36.7% the week prior.
The purchase index also posted an 8% increase week-over-week as lower rates improve buying power for home shoppers. Demand remains strong with buyer traffic up double digits from last year according to Redfin. Many buyers that had been priced out of the market last year are coming back in as rates drop.
Outlook for Home Sales, Prices, and Supply
Mortgage rates falling below 7% mark a turning point that should stimulate home buying demand as affordability improves heading into the spring shopping season. While sales slowed dramatically last year amid surging rates and record high prices, analysts now foresee better times ahead for the housing market:
Home Sales Rebound – Many economists predict home sales growth will resume by mid-2024 thanks to lower rates. Existing home sales are projected to rise around 10% for 2024 as a whole after a nearly 20% plunge last year according to estimates from Fannie Mae and the National Association of Realtors. More buyers coming off the sidelines should support a sales rebound.
Price Growth Moderates – Home prices are expected to see more moderate 4-7% appreciation this year versus over 15% annual gains the last two years. Slower price growth will also help affordability. But structural undersupply means its unlikely there will be any national home price decline absent a severe recession.
Inventory Expands Gradually – While more existing homeowners may list this year with equity gains over 50% since early 2020, new construction has stalled meaning overall inventory will remain low historically. Any increase in supply will be gradual. Redfin forecasts a modest 3% rise in the number of homes for sale this year as sellers remain hesitant. But buyer competition should ease from recent years as demand cools further.
While risks like unemployment remain, the rate driven housing downturn shows early signs of reversing course for the better as we progress through 2024. Sustained lower rates in the high 5% to low 6% range would go a long way toward stabilizing the market and restoring affordability. For those looking to buy or refinance, now continues to be an opportune time to lock in rates before they move higher again. Stay tuned for more coverage as this story develops.
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.
