June 19, 2024
Mortgage

Falling Mortgage Rates: What Lower Inflation and Rate Cuts Mean for 2024


“For now, the big driver of rates will be the economic and inflation data that come out each month.”

Logan Mohtashami
Lead analyst at HousingWire

So far, the new year hasn’t been particularly smooth for the mortgage market. Yet with mortgage rates expected to fall, homebuyers should have an easier time in 2024 than they had last year. 

And that could mean a more positive outlook for the housing market. Even after a slight uptick in mortgage rates after the holidays, mortgage application demand increased the first week in January by 9.9% over the prior week, according to the Mortgage Bankers Association. 

Right now, the average rate for a 30-year fixed mortgage is hovering around 7%, and forecasts show rates inching down to the low-6% range by the end of the year. A lot will depend on the Federal Reserve’s next policy move — specifically when the central bank can start cutting interest rates. 

“For now, the big driver of rates will be the economic and inflation data that come out each month,” said Logan Mohtashami, lead analyst at HousingWire. 

Yet last Thursday’s Consumer Price Index showed the rate of inflation ticking up slightly in December compared to last month. If inflation isn’t under control, interest rate cuts might stay high for longer, which will extend the waiting game for those anxious to buy during the spring homebuying season.

Mortgage rates are expected to go down slowly

Last year was the least affordable housing market on record, according to a report from mortgage brokerage Redfin. So when mortgage rates went on a falling streak in November, it gave market watchers a much-needed boost of optimism

Even though the housing market tends to be seasonal, mortgage interest rates are not. Rates move around on a daily, and even hourly, basis in response to a range of factors, including monetary policy, economic data, 10-year Treasury yields and investor expectations. Some fluctuation in mortgage rates is to be expected. That’s why mortgage experts warn against too much optimism. 

Mortgage rates aren’t going to plummet back to pandemic-era record lows. The more likely scenario is a gradual decline of a percentage or more over the year as markets wait for inflation to improve and for the Federal Reserve to make its first interest rate cut.

Here’s a look at where some of the major mortgage forecasters expect mortgage rates to go:

Interest rate cuts will depend on inflation data

For nearly two years, the Fed has been locked in a battle against inflation. After raising interest rates 11 times — increasing the cost of borrowing money across the economy — inflation has cooled significantly, but it’s still far from the Fed’s 2% annual target.

Having kept its benchmark rate steady since July 2023, the Fed has projected three rate cuts this year. That news, combined with other economic data, is what helped mortgage rates fall significantly in the last two months of 2023.

Yet after dropping more than a full percentage point in nine weeks, mortgage rates started ticking back up around the new year. “Mortgage rates frequently start moving slightly higher from January to February as the spring homebuying season picks up,” said Selma Hepp, chief economist at CoreLogic. 

The Fed’s first policy meeting of the year is at the end of January, with another scheduled in March and a third meeting at the start of May. Most experts say that an interest rate cut won’t happen until May. 

“Fed members may want to see a bit more evidence that the retreat in price pressure is durable,” said Keith Gumbinger, vice president of the mortgage site HSH.com.  

And it’s not necessarily the cuts themselves that will result in lower mortgage rates, according to Mark Zandi, chief economist at Moody’s Analytics. It’s more about the message that rate cuts (even the potential for them) send to financial markets.

Lower mortgage rates should help home prices and housing supply

This year won’t bring housing affordability, but there will be baby steps in that direction, especially if existing home prices soften, according to Hannah Jones, senior economic research analyst at Realtor.com. “With slightly lower mortgage rates and home prices, prospective buyers will see the cost of purchasing a home start to creep down in some areas,” Jones said. 

Still, there aren’t enough homes on the market. Current homeowners with mortgage rates significantly lower than today’s rates are unwilling to sell their homes, which in turn drags down existing housing inventory. But that could change if home loan rates decline. 

“While mortgage rate shock may have kept some households in place the past couple of years, major life events – like a growing family – may cause many to take advantage of lower interest rates to move into a home that better fits their needs,” said Orphe Divounguy, senior macroeconomist at Zillow Home Loans. 

Lower mortgage rates should lead to more people interested in trading up or down to put their homes on the market, said Greg Heym, chief economist at Brown Harris Stevens. “That would help increase existing home supply in certain segments of the market.”

Limited inventory and growing demand for homes could continue to push prices up, however, unless there’s a significant boost in the new construction of single-family homes. “Substantially more units are needed to meet the demand, especially as new buyers — who were previously priced out due to the rise in mortgage interest rates — come into the market,” said Jessica Lautz, deputy chief economist at the National Association of Realtors.

Some advice on mortgage rates

Mortgage rates are determined by an array of macroeconomic conditions, but the one you qualify for will depend on personal factors, such as your credit score. If you want to buy a home in 2024, make sure you’re saving for your down payment, building your credit score, researching loan options and shopping around for lenders. That will put you in a better position to buy a home when it’s right for you. 



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