Mortgage Rates Drop to Start 2024, Sparking Debate on Housing Market Outlook

Mortgage rates fell to kick off 2024, dropping to their lowest level since May 2022 and spurring discussion among experts on what’s next for the housing market. While rates are down from their peak last year, there is disagreement on whether the decline will continue or reverse course later this year.

Rates Fall to 7-Month Lows

Mortgage rates tracked by Freddie Mac fell for the third consecutive week to start the new year, sinking to an average of 6.42% for a 30-year fixed-rate loan. That’s the lowest level since early May 2022 and a significant drop from a peak of 7.08% in early November.

The decline in rates comes after the Federal Reserve raised its benchmark interest rate seven times in 2022 in an effort to tame inflation. However, there are signs inflation may have peaked, leading mortgage rates to ease after surging for much of last year.

Additional data from Bankrate and Mortgage News Daily echoed the downward trend in rates last week:

The dip in rates led to an increase in mortgage application volume to close out December, according to the Mortgage Bankers Association. Refinance activity also picked up, rising 5% for the week while remaining down 86% from last year.

Will the Decline Continue?

While mortgage rates have ticked down from their peak, experts are split on whether the downward trend will continue. Much depends on the path of inflation and the Federal Reserve’s response with interest rate hikes.

Forecasts for Further Declines

Many analysts foresee mortgage rates falling further in 2024 as inflation continues to moderate and the Fed pauses its rate hiking campaign.

• NerdWallet predicts 30-year fixed mortgage rates will average 6.2% over the course of 2024 and could dip as low as 5.5% in the second half of the year.

• Bankrate sees rates for a 30-year mortgage dropping to 6.13% by the end of 2024.

• Economists surveyed by Fannie Mae estimate rates will average 6.4% this year and slip to 6.1% for 2025.

Projections for Rates to Rise Again

However, other experts warn mortgage rates could resume their climb later in 2024 as a resilient labor market and consumer spending re-accelerate inflation, forcing the Fed’s hand.

• The Mortgage Bankers Association expects the 30-year fixed mortgage rate to rise to 7.4% by year-end 2024 before falling in 2025.

• Flagstar Bank sees rates returning to 7% in the first half of 2024 due to persistent inflation before edging lower.

The direction of mortgage rates holds major implications for the housing market outlook. While lower rates could spur home buying activity, another leg higher would extend the affordability squeeze for buyers.

Housing Market Impact

The drop in mortgage rates to kick off 2024 provided some relief to buyers after last year’s surge priced many out of the market. However, experts say home prices remain high by historical standards and buyers still face affordability constraints.

Could Support Housing Stabilization

If rates continue falling in 2024 as some forecasters predict, it would ease the significant affordability pressures home buyers faced last year. While average monthly mortgage payments soared in 2022, lower interest rates would bring payments down and potentially stabilize the housing market.

• Freddie Mac estimates the dip in rates from November to December 2022 sliced average monthly mortgage payments by 15% or around $260.

But Price Appreciation Is the Wild Card

However, the outlook also depends heavily on where home prices head next. Many analysts say the rapid price gains of the past two years are unsustainable and expect more modest single-digit appreciation in 2024 and 2025. But others see room for further gains, especially if buyer demand rebounds sharply.

“Rising home prices may negate some of the savings from lower interest rates,” said Daryl Fairweather, chief economist at real estate brokerage Redfin. “So buyers probably shouldn’t wait in hopes that 2024 will bring back the affordability we saw pre-pandemic.”

Could Spur More Listings

Nonetheless, if rates ease further, it could convince more prospective home sellers to list their properties after hesitating during last year’s turmoil. That would help address the housing supply shortages plaguing many markets.

“If mortgage rates drop below 6%, expect more listings, more sales, and the return of bidding wars in many metro areas,” said real estate analyst Bill McBride.

The Road Ahead

Mortgage rates have shown they still have room to decline after spiking to 20-year highs last year. But key variables like the path of inflation and Federal Reserve policy will determine whether the downward trend can continue.

Lower rates would aid the housing market recovery after deteriorating affordability shut out many buyers in 2022. But further rate hikes could throttle demand once again. Home buyers and sellers alike will be tracking mortgage rate movements closely in the months ahead to gauge the outlook.

With the Fed’s January policy meeting around the corner, Chairman Jerome Powell’s tone and latest economic projections will provide important clues on rates. The central bank faces a delicate balancing act in 2024 between tightening enough to fully tame inflation and avoiding tipping the economy into recession.

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