Mortgage rates fell to their lowest level since last May this past week, dropping to an average of 6.6% for a 30-year fixed-rate loan. This marks a significant turnaround from the highs reached last fall when rates peaked above 7%, and has sparked optimism that the housing market may be poised for a rebound after a tough 2023.
Declining Rates Boost Mortgage Demand
The dip in rates has led to a surge in mortgage applications, with demand jumping over 10% last week compared to the previous week according to data from the Mortgage Bankers Association (MBA).
Refinancing also saw an uptick, rising 13% week-over-week. Many current homeowners have rates well above current levels, making it an opportune time to refinance and lock in savings.
| Week | Mortgage Application Volume | Refinancing Volume |
|---|---|---|
| Week Ending Jan 13 | 251.7 | Share of 39.8% |
| Week Ending Jan 20 | 278.1 | Share of 45% |
This rise in demand could mark a turning point after applications fell around 30% over the course of 2023 as rates increased. The lower rates we’re now seeing are pulling buyers back into the market at the start of the spring homebuying season.
Factors Driving the Rate Drop
Rates are sensitive to inflation and actions by the Federal Reserve. As inflation has steadily declined over the past months and the Fed has slowed its pace of rate hikes, Treasury yields have fallen in turn. This filters down to mortgage rates tied to those Treasuries.
The Fed’s latest 0.25% rate hike this month was smaller than its previous moves, signaling it may pause further hikes soon. Markets are betting rates could fall further if inflation continues cooling and the Fed stands pat.
Projections Call for Continued Declines
The dip below 6.6% is expected to be just the beginning, with multiple forecasts calling for rates around 6% or slightly lower by the end of 2024. Freddie Mac projects rates could return closer to 5% later this year or in early 2025.
Fannie Mae’s latest forecast sees rates averaging 6.2% in 2024 on its way to 5.2% in 2025. Meanwhile, the MBA expects rates will bottom out at 5.8% towards year-end 2024.
If accurate, we could be on the cusp of a welcome shift for homebuyers after last year’s housing cooldown. Lower monthly payments would help improve affordability and get more buyers in the market.
Lock-in Effect Fades Among Homeowners
For much of 2023, skittish homeowners were hesitant to list their properties due to unfavorable rates on a new mortgage they may need to take out. This inventory shortage was a key driver of last year’s housing decline.
But in a promising sign, recent surveys show the so-called “lock-in effect” may be moderating along with the drop in rates. More existing owners now say they are considering selling within 12 months as rates become less daunting.
Redfin’s latest consumer survey found 24% of owners said they were likely to sell this year, up from 20% last fall. Zillow similarly saw sellers expressing more willingness to list. If this sentiment shift continues and leads owners to act, inventory could stop being such a drag on the market.
Housing Affordability & Sales Should Improve
The big question is whether lower rates will successfully lure buyers back after last year’s pullback in demand. So far signals point to increased affordability and strengthening sales over 2024.
Mortgage payments consume a lower share of income now for potential buyers compared to autumn 2022 when rates spiked. Home price drops in many markets are also negating part of the rise in rates.
Zillow expects existing home sales to rise about 6% for 2024, while Fannie Mae sees a smaller 3% increase. New home sales could jump more dramatically by 11% according to Fannie Mae. Either forecast would mark the first annual sales gains since 2021.
If rates fall to the degree projections suggest, buying activity stands to ratchet higher. But inventory and home prices remain wild cards. Sellers will need to get more realistic on pricing, and supply must pick up for sales to fully rebound.
Risks Could Delay or Derail Comeback
Though there is budding optimism for stabilization or recovery this year, risks still abound that could upend forecasts. Top hazards include:
Inflation re-acceleration – More concerning inflation readings could force the Fed’s hand to keep rates higher or even resume hikes. This would reverse the progress on rates and housing.
Labor market stays too strong – An exceptionally tight job market enabling outsized wage growth poses an inflation complication. Layoffs may be needed to cool things off.
Inventory stays lean – If short supply persists it will thwart sales momentum. Remote work flexibility could continue suppressing listings as owners need less space or room to move.
Overcorrection triggers recession – Aggressive Fed policy intended to tame inflation could inadvertently cause economic contraction later, taking housing back down with it.
Variant outbreak – A more troublesome COVID strain or different virus managing to spread rapidly could introduce health and financial uncertainty.
For now at least, there seems to be some light at the end of 2023’s housing tunnel. But more market healing is required, and risks loom that could impede progress. Homebuyers hoping for their chance to buy may just have to stay nimble a while longer amid the twists and turns ahead.
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.
