“We changed a couple of things on rates,” the economist said. “We now see mortgage rates coming down ending 2024 just under 6%. Our fourth-quarter number is 5.8%, which is a shift. Previously, we had somewhere in the neighborhood of 6.5%, so that’s a pretty good drop.”
Rate cuts depend on a variety of factors
In terms of rate cuts: “We shifted our thinking on the Fed from previously three rate cuts in ’24 to now four rate cuts in ’24. The market is arguing maybe up to seven. We don’t see that; we think that’s pretty aggressive.”
A more arcane metric that’s contributed to high rates is the spread – the gap between the 30-year mortgage rates and its cousin, the 10-year Treasury yield. That interval colloquially known as the spread typically runs between 1.5 to 2 percentage points. But of late, the gap has at times exceeded 3%, unlike differentials seen during the Great Recession.
Duncan now sees a gap reduction: “We also think that as there’s more clarity on the Fed’s portfolio, some of that might show up in a reduction in the spread in the mortgage space. So, even if the underlying rates don’t fall as far, spreads narrow. That, too, will bring that rate down to consumers.”
Duncan referenced the abstraction of the spread to those outside the economic cognoscenti: “It’s funny. If you ask people why spreads are wide, they say ‘because of volatility.’ Well, what’s driving volatility? They’ll say ‘well, the Fed.’ Well, what about the Fed? Then the conversation sort of dissipates.”
