The beginning of a new financial year is usually a time for crystal balling - looking at the past trends and trying to foresee what lies ahead.
Yet hindsight may not always lead to foresight, they can at best be our guiding star.
Mortgage rate predictions are no different.
Especially when mortgage rates have been jumping around over the past two years - and more so since 2023, when the Fed started tightening the noose around inflation .
At the start of 2023, economists predicted that mortgage rates would gradually decline throughout the year, but it didn’t stick . In fact, rates trended higher, reaching a new peak of 7.79% in late October - mostly due to quarter on quarter interest rate hikes by Fed. Since then, mortgage rates have pulled back, defying expectations by plunging to around 6.6% by year-end.
Looking at last year's mortgage rate predictions that was wildly, one might take the 2024 forecasts with a pinch of salt. However, navigating through the complexities of mortgage rates, especially in the volatile economic landscape, requires a deep dive into both predictive analyses and the factors that currently influence these rates. Going into 2024, most economists & forecasters agree that rates should decline through the year and gradually reach a steady state at around 6% by year-end.
Here’s a quick look at what some experts have to say:
• Wells Fargo: Rates Will Decline to 6%
In its latest U.S. Economic Outlook, the Economics Group of Wells Fargo Bank predicted the 30-year FRM at 6.8% in the first quarter of 2024, sliding down to 6.05% by the end of the year. It further predicts that rates will dip below 6% at the beginning of 2025.
• Fannie Mae: Rates Will Decline to 5.8%
Fannie Mae’s January Housing Forecast puts the average 30-year FRM at 6.4% during Q1 of 2024, falling to 5.8% by year-end.
While optimistic, this reflects a major downward revision in Fannie's forecast from two months ago - when it expected the rates to stick to 7%+ until the second quarter of 2025. On the whole, Fannie Mae predicts mortgage rates will hover around 6.1% in 2024 and 5.6% in 2025.
• NAR: Rates Will Decline to 6.1%
The National Association of Realtors expects mortgage rates to stay in the neighborhood of 6.8% in the first quarter of 2024, sliding to 6.6% in the second quarter. It further predicts that rates will continue to fall to 6.1% by the end of the year.
In a nutshell, major US housing market forecasters are unanimously batting for mortgage rates to fall to at least 6% by the end of this year & remain in the neighborhood until 2025.
Triggers for 6% mortgage rate predictions
While there are several reasons that influence the mortgage rates - one of the key factors in recent times has been the Fed's expected rate cuts in 2024. The Fed has hinted at three cuts in 2024 over the next quarters. The first is said to be in March but it could spill over to June.
If we dial back the clock, then we will see that mortgage rates shot up in 2023 as a natural outcome of the Fed's successive rate hikes to bring annual inflation back to its 2% target amid positive economic growth.
The central bank raised the federal funds rate seven times in 2022 and another four times in 2023, with the latest 25-basis-point rate hike coming at its July meeting.
But with the economy cooling off, the Fed decided to put brakes & in fact loosen the rope around interest rates. During the Fed's January rate-setting meeting, policymakers voted again to hold the rate steady at 5.25% to 5.5%. Fed Chair Powell said at a Dec.13 news conference that another rate hike is "not likely."
In fact, the Fed released its updated projections materials, which show that three rate cuts are expected in 2024, bringing the rate down by three-quarters of a percentage point by the end of the year. NAR anticipates the Fed will actually cut rates four times this year. These positive sentiments are also echoing in the economy at large - markets are pricing in a 96% probability of rate cuts by May, according to CME Group's FedWatch Tool.
While Fed rate cuts are one the most significant drivers of mortgage rates softening, another factor driving this - is the abnormally large spread between the 30-year fixed mortgage rate and the yield on 10-year Treasury bonds. That spread typically hovers around 170 basis points, but it was closer to 300 basis points throughout most of 2023.
Treasury yields have moderated over the past month, and if spreads were to return to "normal," mortgage rates would be under 6%. While the spread probably won't fall to 170 points anytime soon - it is expected to retreat somewhat this year, which will help bring mortgage rates to the low-6% range.
A wait worth the watch
As we look towards 2024, the mortgage rate landscape presents both challenges and opportunities for borrowers, lenders, and market participants. While forecasts suggest a potential easing of rates, the economic and policy environment remains fluid, necessitating close monitoring and adaptive strategies.
For now, the forecasts for declining mortgage rates offer a hopeful outlook and a breath of fresh air for both homebuyers and the housing market - it’s a wait, worth the watch.