Soaring mortgage rates, high home prices and low inventory defined the housing market in 2023. But 2024 is starting to show signs of a modest recovery, with mortgage rates expected to steadily trend down in the coming months, just in time for the spring homebuying season.
The silver lining, according to experts, is mortgage rates reaching 6% or lower by the end of the year. A recent report from Fannie Mae shows the average rate for a 30-year fixed mortgage hitting 5.8% by year-end. Fannie Mae’s Chief Economist Doug Duncan noted in a Jan. 18 press release that sub-6% rates combined with an increase in new home construction should aid affordability.
Specifically, lower rates are likely to help thaw the frozen home sales market and chip away at the “lock-in” effect, which has restricted the housing supply. Homeowners who secured low-interest mortgages before 2022 have been reluctant to sell their properties because they have little financial incentive to do so.
But for rates to move down to the 5% range will depend largely on inflation and the Federal Reserve’s next policy move -- especially when the Fed starts 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.
When will mortgage rates go down?
2023 marked the least affordable housing market on record, according to a report for mortgage brokerage Redfin. So when mortgage rates went on a falling streak in November, it gave market watchers a much-needed boost of optimism.
But mortgage 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. Even as experts see rates falling over the long term, expect some fluctuation along the way.
Similar to 2023, inflation data and the central bank’s interest rate adjustments will play a big role in the direction of mortgage rates.
Instead of mortgage rates dropping swiftly, 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 Fed to make its first interest rate cut.
Here’s a look at where some of the major mortgage forecasters expect mortgage rates to go:
When will interest rate cuts happen?
The Fed has been locked in a battle against inflation for nearly two years. 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, 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 latest Consumer Price Index showed the rate of inflation up slightly in December compared to the prior month. If inflation isn’t controlled, interest rate cuts might stay high for longer, extending the waiting game for those anxious to buy a home this year.
“Rates moving into the 5% to 6% range is a valid possibility, but one that depends on economic data,” said Matt Graham of Mortgage News Daily. “Specifically, core month-over-month inflation readings would need to consistently hit 0.2% or lower, and we’re not seeing that yet,” added Graham.
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.
When will home prices and housing supply improve?
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.
Mortgage rates and homebuying in 2024
Mortgage rates are determined by an array of economic 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 a 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.
