“Overall, we expect 2024 to be a better year than 2023 for homebuyer affordability and the mortgage industry,” Fannie Mae’s chief economist said.
WASHINGTON – The housing market will begin a gradual return to a “more normal balance” in 2024, and mortgage rates are expected to end the year below 6%, Fannie Mae analysts said.
Fannie Mae’s Economic and Strategic Research (ESR) Group said the lower rate environment should boost refinance volumes, which are already on the upswing. Lower rates are also likely to loosen the so-called lock-in effect that’s had a stronghold on the market.
“In fact, the ESR Group expects the annualized pace of existing home sales to move up to 4.5 million units by the fourth quarter of 2024, compared to 3.8 million in Q4 2023,” Fannie Mae analysts said in the January report. “However, a full recovery to the pre-pandemic sales rate is expected to take years, as housing affordability remains stretched extremely thin by historical standards relative to household incomes.”
At the same time, housing supply shortages and affordability constraints will continue to bolster the market for new single-family homes, with 2024 starts and new home sales forecast to top 2023 levels.
The ESR Group also said home prices are expected to rise 3.2% over the year, compared to 7.1% in 2023. While the latest forecast continues to project a slowdown in economic growth in 2024, the ESR Group anticipates a brighter economic backdrop compared to previous months, replacing its call for a modest recession with positive-but-below-trend growth in 2024.
The ESR Group noted the rapid recent easing in financial conditions, the Federal Reserve’s December meeting and the solid, upward trend in real personal income growth in October and November as positive impulses for growth over the coming quarters. But, the group said, the economy still faces a higher-than-normal risk of recession.
“Inflation’s decline and the resultant Fed pivot to signaling future rate cuts rates lead us to believe that home sales and mortgage originations likely bottomed out in the second half of 2023 and that a gradual improvement is now underway,” Doug Duncan, Fannie Mae senior vice president and chief economist, said.
“We expect mortgage rates to dip below 6% by year-end 2024 and for homebuilders to continue to add new supply, both of which should aid affordability. Additionally, the decline in mortgage rates is likely to push refinancing volumes upward, along with some pickup in purchase financing. However, even at less than 6 percent, we think rates will still have a significant way to go in order to meaningfully reduce the ‘lock-in effect’ experienced by homeowners who refinanced or bought during the pandemic. Overall, we expect 2024 to be a better year than 2023 for homebuyer affordability and the mortgage industry.”
Macro Trends Advisors founding partner Mitch Roschelle joins ‘Varney & Co.’ to discuss the housing market under the Biden administration as monthly mortgage payments continue to soar.
New U.S. home construction fell in December for the first time in four months, despite a sharp drop in mortgage rates.
Housing starts decreased 4.3% last month to an annual rate of 1.46 million units, according to new Commerce Department data released Thursday. Refinitiv economists had projected a pace of 1.42 million units. The decline stemmed from a substantial drop in single-family home construction, which fell by the most since July 2022.
However, applications to build – which measures future construction – rose in December, increasing 1.9% over the course of the month to an annualized rate of 1.49 million units. When compared with the same time last year, building permits are up about 6.1%.
“Building permits, a leading indicator of future construction, accelerated in December as builders expect the housing market to improve as borrowing costs fall,” said Jeffrey Roach, chief economist at LPL Financial.
HOME FORECLOSURES ARE ON THE UPSWING NATIONWIDE
Homes are under construction in Sacramento, California, on July 3, 2023. (David Paul Morris/Bloomberg via / Getty Images)
The data comes one day after the National Association of Home Builders/Wells Fargo Housing Market Index, which measures the pulse of the single-family housing market, rose five points to 44. The increase followed a three-point increase in December.
Any reading below 50 is considered negative.
MORTGAGE CALCULATOR: SEE HOW MUCH HIGHER RATES COULD COST YOU
“Lower interest rates improved housing affordability conditions this past month, bringing some buyers back into the market after being sidelined in the fall by higher borrowing costs,” said Alicia Huey, NAHB chair and a custom home builder and developer from Birmingham, Alabama.
A sign outside a home for sale in Atlanta on Sept. 6, 2023. (Elijah Nouvelage/Bloomberg via / Getty Images)
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Sentiment among builders began steadily falling at the end of the summer after mortgage rates shot above 7%, throttling demand among would-be homebuyers. But borrowing costs have retreated over the past two months as many investors believe the Federal Reserve is done with its aggressive interest-rate hike campaign – and will soon pivot to cutting rates.
Rates on the popular 30-year fixed mortgage are currently hovering around 6.66%, according to Freddie Mac, down from a high of 7.79% at the end of October but well above the pre-pandemic average of 3.9%.
The recent decline has prompted a burst of optimism among homebuilders that the worst may be over. However, the housing market is facing new headwinds heading into 2024, including higher prices and shortages of labor and lumber.
The California Association of Mortgage Brokers (CAMB) released its annual mortgage survey for 2008 this week, claiming that the ongoing housing crisis could lead to a recession if the conforming limit isn’t raised in California.
When asked if the current housing slump will create a recession in 2008, 47 percent of mortgage brokers surveyed said yes, while 43 percent believe the real estate market will not fully rebound until 2009.
“In order to stem the tide of a possible recession, CAMB is calling upon state and federal legislators to designate California a high cost state, which will increase the limit for conforming loans in California and provide a more stable mortgage product for consumers,” said Pete Ogilvie, president of the California Association of Mortgage Brokers, in a statement.
Despite the recession worries, 48 percent of members believe that housing affordability will get a little better in 2008 and 17 percent believe it will get a lot better.
“While home prices will continue to decrease into 2008, more stable loan products will reappear for consumers looking to purchase a home,” said Ogilvie. “2008 will be the year of market self-correction, and should also reward those who have been waiting for affordable housing prices.”
Fifty-five percent of those surveyed believe the FHA loan will return to popularity in 2008, while 18 percent feel products such as mortgage insurance will rise in popularity.
At the same time, 59 percent of members believe that qualifying borrowers will be more difficult in 2008 due to tighter underwriting standards, especially for those with below-average credit scores.
And 41 percent think it will be more difficult to find a loan program for qualified borrowers next year.
Additionally, 60 percent of those surveyed believe cash-out refinances will decrease in 2008 as homeowners will likely be wary of refinancing their homes during a declining market, assuming they have any home equity to begin with.
Finally, 31 percent of surveyed members believe that April-June of 2008 will be the best time to buy a home, with 28 percent saying the January-March period will be the right time.
Mortgage rates continued their descent this week to mark their lowest level since May 2023, welcome news for homebuyers who have been waiting on the sidelines for rates to drop.
The 30-year fixed-rate mortgage averaged 6.6% as of Jan. 11, a decrease from last week’s 6.66%, according to Freddie Mac‘s Primary Mortgage Market Survey released on Thursday.
The 15-year fixed-rate mortgage averaged 5.76% this week, down from 5.87% the prior week. HousingWire’s Mortgage Rates Center showed Optimal Blue’s average 30-year fixed rate on conventional loans at 6.709% on Thursday, up from 6.66% recorded at the same time last week.
“This is an encouraging development for the housing market and in particular first-time homebuyers who are sensitive to changes in housing affordability. However, as purchase demand continues to thaw, it will put more pressure on already depleted inventory for sale,” said Sam Khater, Freddie Mac’s chief economist.
Housing starts declined 9% in 2023, an indication that homebuyers looking to purchase a new construction home may continue to struggle with the lack of inventory this year.
With mortgage rates continuing their downward trend last week with softer inflation readings – the so-called core consumer price index that excludes volatile food and energy prices – pulling them lower, mortgage demand was up in the week ending Jan. 12 compared to a week earlier.
“Mortgage applications jumped more than 10% as a result, with solid increases for both refinances and home purchases. The continuing decline in mortgage rates is promising for households looking to buy a home in the coming months,” said Bob Broeksmit, Mortgage Bankers Association’s (MBA’s) president and CEO.
Purchase apps increased by 9% from one week earlier on a seasonally adjusted basis, and refis were up 11% in the same period.
This week, December’s retail sales report showed strong consumer spending even after adjusting for holiday spending and inflation as policy makers mull rate cuts.
Eyes on the Fed’s rate cut timeline
After the Federal Reserve began its restrictive monetary policy in March 2022, officials anticipated at least three rate cuts in 2024 at their December meeting. The Fed next meets on Jan. 30-31.
According to projections from central bank officials, rates would be slashed to a median 4.6% by the end of 2024 from the current federal funds rate range of 5.25%-5.5%.
More than 57% of investors have priced in at least a quarter-point cut in March, according to the CME Group’s FedWatch tool. That is down from 67% last week and roughly 71% about a month ago.
Fed Governor Christopher Waller advocated moving carefully with lowering interest rates while acknowledging that cuts are likely this year.
“When the time is right to begin lowering rates, I believe it can and should be lowered methodically and carefully,” Waller said in prepared remarks at the Brookings Institution on Tuesday.
“In many previous cycles … the FOMC cut rates reactively and did so quickly and often by large amounts. This cycle, however, … I see no reason to move as quickly or cut as rapidly as in the past,” he added.
Mortgage rates dropped 6 basis points from last week even as the benchmark 10-year Treasury yield hit its highest point in over a month, Freddie Mac reported.
The 10-year Treasury has been on the rise since last week’s inflation report. However mortgage rates can be influenced by other factors, including secondary market pricing.
Mortgage rates now above 6% should fall below that level by the end of the year, Fannie Mae’s January housing forecast, which was also issued this morning, declared. Furthermore, that government-sponsored enterprise backed off its call for a recession this year.
Instead, the U.S. will have positive economic growth, albeit below the normal trend, Fannie Mae forecast.
Freddie Mac’s Primary Mortgage Market Survey for Jan. 18 put the average for the 30-year fixed rate loan at 6.6%, versus 6.66% one week prior and 6.15% for the same time in 2023. It is the first decline in the rate in three weeks.
The 15-year FRM, which had declined in recent weeks, continued its slide, falling 11 basis points to 5.76% from 5.87%. A year ago, it was at 5.28%.
This is the lowest level for mortgage rates since May, Freddie Mac said.
“This is an encouraging development for the housing market and in particular first-time homebuyers who are sensitive to changes in housing affordability,” said Sam Khater, Freddie Mac’s chief economist in a press release. “However, as purchase demand continues to thaw, it
will put more pressure on already depleted inventory for sale.”
But on Jan. 18, the 10-year Treasury rose as high as 4.13%, a level not seen since Dec. 13, 2023, when it peaked at 4.19%. The yield closed at 3.98% on Jan. 11. That suggests there are mixed signals in the market.
The 30-year FRM should nevertheless reach 5.8% in the fourth quarter of 2024, and fall further to 5.5% by the same quarter next year, and that should boost refinance production, said Doug Duncan, Fannie Mae’s chief economist, in a press release. This compared with 6.5% and 6.1% in his December economic outlook.
“However, even at less than 6%, we think rates will still have a significant way to go in order to meaningfully reduce the ‘lock-in effect’ experienced by homeowners who refinanced or bought during the pandemic,” Duncan said. “Overall, we expect 2024 to be a better year than 2023 for homebuyer affordability and the mortgage industry.”
Duncan boosted his refinance forecast for 2024 versus December by 9% to $490 billion from $451 billion. The 2025 refi prediction now calls for $752 billion of refis, up from $686 billion in December.
The purchase mortgage outlook was also boosted for this year and next, to $1.49 trillion and $1.69 trillion respectively, from $1.43 trillion and $1.62 trillion in December. Total volume in 2024 is now expected to reach $1.98 trillion and for 2025, $2.44 trillion.
Duncan also dropped his estimate of 2023 total volume to $1.53 trillion to just under $1.5 trillion.
As global central banks raised interest rates to tame inflation,
home prices have cooled relative to the start of the hiking cycle. However, despite the
sensitivity of the residential market to higher policy rates, prices are
still above historical averages. Home prices in advanced economies,
including most European Union countries, as well as Africa and the Middle
East are 10 percent to 25 percent higher than pre-pandemic levels.
Rising interest rates have passed swiftly to residential mortgage markets,
impeding affordability for current and prospective home buyers.
Additionally, scarce home supply is limiting purchases in some regions. In
all, housing affordability is more stretched amid still-elevated home
prices and higher interest rates.
In the first half of 2023, mortgage rates in advanced economies climbed by
more than 2 percentage points compared to the previous year. During this
period, countries like Australia, Canada and New Zealand witnessed
substantial declines in real house prices, likely due to a high share of
adjustable-rate mortgages and home prices that have been stretched since
before the pandemic. Comparatively, home prices have fallen more than 15
percent in some advanced economies while the drop in emerging economies was
less significant. But, on net, real house prices will need to keep cooling
from the 2021 and 2022 highs to reach pre-pandemic levels.
Higher borrowing costs are likely to see the largest impact on household
debt service ratios—a measure of borrowers’ loan repayment ability—in
countries where housing markets remain overvalued and average lifespans for
mortgage loans are shorter, according to our latest
Global Financial Stability Report.
Approvals and repayment
For instance, for some advanced economies such as Norway, Sweden, Denmark,
and the Netherlands with pre-existing double-digit households’
debt service ratios, borrowers’ debt servicing costs could increase by up to 1.8 percentage
points given the surge in interest rates. That would have consequences for
loan approvals and borrower repayment capabilities. But borrowers are also
less indebted, and underwriting standards have been strengthened since the
global financial crisis, tempering the risk of a surge in loan defaults.
This may have also limited instances of forced selling or foreclosures of
homes, helping to support home prices.
In the United States, the Federal Reserve’s interest rate hikes brought big
changes to the mortgage loan market, with the average rate on a 30-year
fixed mortgage recently reaching a two-decade high of 7.8 percent. For
prospective buyers, entry costs are putting homeownership further out of
reach as the required down payments have also become a prohibitive factor
because savings have shrunk since the pandemic.
Existing homeowners, deterred from purchasing new properties due to larger
monthly mortgage payments, stay put causing a reduction in supply of
existing homes. This phenomenon, known as “lock-in” effect, is particularly
evident in the United States, where long-tenured fixed-rate mortgages are
most popular. With average 30-year mortgage rates currently at 6.6 percent,
around 3 percentage points above pandemic lows, mortgage originations
remain 18 percent below last year’s levels while refinancing applications
increased 8.5 percent over the year as mortgage rates continued to ease.
Rates and refinancing
The 30-year fixed-rate mortgages accounted for 90 percent of new US home
loans at the end of last year, according to ICE Mortgage Technology. Almost
two-fifths of all US mortgages were originated in 2020 or 2021, ICE data show,
as the low interest rates during the pandemic allowed many Americans to
refinance their home loans.
Higher interest rates also raise rental costs. Many people prefer to rent
instead of buying given median house prices have been slow to adjust. In
this context, the combination of higher rates and still-scarce housing
supply creates a vicious circle that complicates central banks’ fight
against inflation. US monthly home prices continued to rise in October
compared with a year ago, with shelter contributing to one-third of the
change of consumer prices in November.
mortgage rates will continue to adjust, and pent-up housing demand could be
unleashed. A sudden increase, as the result of rapid rate cuts, could
offset any improvements in housing supply, causing prices to rebound.
The average rate on 30-year fixed mortgages ticked down to 6.94% this week from 6.96% the previous week, according to Bankrate’s weekly national survey of large lenders.
Just a few months ago, the average rate on 30-year home loans topped 8%. But mortgage rates dropped after the Federal Reserve indicated it’d begin cutting its key rate in 2024. The central bank’s long-awaited pivot was spurred by a number of factors, including a slowing job market and signs that the Fed’s ongoing war on inflation is working.
Meanwhile, yields on 10-year Treasury bonds, an informal benchmark for 30-year mortgage rates, have dropped from 5% to around 4% in recent weeks.
The Fed doesn’t directly control mortgage rates, but it plays a pivotal role. The central bank sets policy that affects the cost of home loans. At the conclusion of its most recent meeting on Dec. 13, the Federal Open Markets Committee decided to leave rates unchanged.
“The recent decline in rates has given the housing market some cause for optimism going into 2024, but purchase applications have not yet picked up in response,” says Joel Kan, deputy chief economist at the Mortgage Bankers Association.
The rate cool-off somewhat eases the housing affordability squeeze. It also bodes well for a housing market that has been sluggish since 2022. However, a still-strong economy has undermined hopes that the Fed will begin cutting rates soon.
“The economy’s not slowing down as quickly as the Fed would hope,” says Scott Haymore, head of pricing and secondary markets at TD Bank.
What happened to mortgage rates this week
The 30-year fixed mortgages in this week’s survey had an average total of 0.34 discount and origination points. Discount points are a way for you to reduce their mortgage rate, while origination points are fees a lender charges to create, review and process your loan.
Over the past 52 weeks, the benchmark 30-year fixed-rate mortgage averaged 7%. A year ago, the 30-year fixed-rate mortgage was 6.55%. Four weeks ago, that rate was 7.21%. The 30-year fixed-rate average for this week is 0.67%age points higher than the 52-week low of 6.27%.
As for other types of loans:
—The 15-year fixed-rate mortgage was 6.19%, down from 6.21% from a week ago.
—The 5/6 adjustable-rate mortgage (ARM) was 6.95%, down from 6.96% a week ago.
—The 30-year fixed-rate jumbo mortgage was 6.94%, down from 7% a week ago.
How mortgage rates affect home affordability
The national median family income for 2023 was $96,300, according to the U.S. Department of Housing and Urban Development, and the median price of an existing home sold in November 2023 was $387,600, according to the National Association of Realtors. Based on a 20% down payment and a mortgage rate of 6.94%, the monthly payment of $2,050 amounts to 26% of the typical family’s monthly income.
The steep climb in mortgage rates over the past two years has squeezed affordability and sparked a slowdown in home sales. First-time buyers are especially challenged by this market. Home prices haven’t fallen significantly, and values are unlikely to decline, given the shortage of homes for sale.
“Higher mortgage rates have a dual impact on the housing market: reducing affordability for buyers and strengthening the rate lock-in for sellers,” says Odeta Kushi, deputy chief economist at First American. “The combination of reduced affordability and increased strength of the rate lock-in effect is likely to continue to suppress home sales because you can’t buy what’s not for sale, even if you can afford it.”
Reflecting the affordability squeeze, the median household income for homebuyers jumped to $107,000 in 2023 from $88,000 last year, according to the National Association of Realtors’ 2023 Profile of Home Buyers and Sellers.
Will mortgage rates go down?
Economists expected to see mortgage rates decrease dramatically by now, but the resilience of the U.S. economy had thrown a wrinkle into those predictions. Things finally seem to be cooling, especially 10-year Treasury yields.
Mortgage rates are also chained to inflation, a metric the Fed has been moving to control. At its most recent meetings, the central bank opted to keep rates unchanged. While the Fed doesn’t directly set fixed mortgage rates, it does set the tone of the interest rate environment.
Methodology
The Bankrate.com national survey of large lenders is conducted weekly. To conduct the National Average survey, Bankrate obtains rate information from the 10 largest banks and thrifts in 10 large U.S. markets. In the Bankrate.com national survey, our Market Analysis team gathers rates and/or yields on banking deposits, loans and mortgages. We’ve conducted this survey in the same manner for more than 30 years, and because it’s consistently done the way it is, it gives an accurate national apples-to-apples comparison. Our rates differ from other national surveys, in particular Freddie Mac’s weekly published rates. Each week Freddie Mac surveys lenders on the rates and points based on first-lien prime conventional conforming home purchase mortgages with a loan-to-value of 80%. “Lenders surveyed each week are a mix of lender types — thrifts, credit unions, commercial banks and mortgage lending companies — is roughly proportional to the level of mortgage business that each type commands nationwide,” according to Freddie Mac.
If you’ve been sitting on the housing market sidelines because of sky-high mortgage rates, there’s good and bad news heading into 2024. The good? Mortgage rates are expected to drop in the new year. The bad? They probably won’t drop as much as you’d like.
“The pandemic was too hot; 2023 was too cold,” says Odeta Kushi, deputy chief economist at First American Financial Corporation, a title insurance and settlement services provider. “2024 won’t be just right, but it will be heading in a normalizing direction.”
Mortgage rates climbed for most of 2023, reaching nearly 8%—a level not seen in two decades. Though a far cry from the double-digit highs of the 1970 and 80s, for hopeful buyers, those rates crushed affordability. And for would-be sellers, they had a lock-in effect. Homeowners who might have otherwise sold instead stayed put not wanting to lose existing—much-lower—interest rates.
Keeping with many other housing economists, Kushi expects mortgage rates to decline in 2024—but only a modest amount. Should those predictions ring true, the question is whether the drop will be enough to shift housing affordability in the right direction.
How far could mortgage rates drop in 2024?
The consensus among industry professionals is that mortgage rates will gradually decline across 2024. Here’s where experts are predicting mortgage rates will land by the end of 2024:
Source
Projected 30-year mortgage rate (by end of 2024)
Mortgage Bankers Association
6.1%
Fannie Mae
6.5%
Realtor.com
6.5%
Redfin
6.6%
National Association of Realtors
6 to 7%
At the close of 2023, the average rate on a 30-year fixed-rate mortgage was 6.61%, according to Freddie Mac. While that’s about average historically—and down more than a full percentage point since rates peaked at 7.79% in October—such high rates were unthinkable just two-years ago.
Back then, the Federal Reserve was holding short-term interest rates near zero to spur the pandemic-battered economy, and mortgage lenders were offering rates below 3%. This pushed up demand for mortgages from home buyers, as well as from homeowners looking to refinance existing loans. Once the Fed started raising rates to fight inflation in March 2022, though, mortgage lenders reversed course. The result was steadily rising home-financing costs, slowing home sales and essentially nonexistent refinance demand.
The year ahead is poised to be another turning point in the mortgage world. With inflation seemingly under control, the Fed has signaled it could begin cutting interest rates in 2024, likely around midyear. While the Fed doesn’t directly determine mortgage rates, it’s likely that lenders will again follow the Fed’s lead. “Our modeling suggests a gradual, steady decline,” says Danielle Hale, chief economist at Realtor.com. (News Corp, parent of The Wall Street Journal, operates Realtor.com.)
But there are no guarantees. “The primary factor for mortgage rates is ongoing improvement in inflation,” Hale says. “If we don’t see that progress on a sustained basis, we would be looking at a very different, higher interest rate environment.”
If inflation starts rising again, rates may stay higher for longer. On the other hand, if inflation falls below the Fed’s 2% target or the economy shows signs of distress, the Fed may move to lower rates sooner than anticipated.
“After a couple of years of exceedingly low rates, we may need to redefine what a normal market is supposed to look like,” says Miki Adams, president of CBC Mortgage Agency, a mortgage lender and down payment assistance provider in South Jordan, Utah.
What lower mortgage rates could mean for home buyers
A fall in mortgage rates is obviously good news for hopeful home buyers. But will those lower rates be a game changer? Likely not for most consumers. Here’s what we can expect falling mortgage rates to look like on the ground.
Affordability will improve—a bit
Lower rates will make mortgage payments lower, but buyers shouldn’t expect any drastic improvements in affordability. On a $500,000 loan, for example, a 7% rate would mean a monthly mortgage payment of just over $3,300. At Realtor.com’s projected year-end 6.5% rate, that payment would drop to $3,160—a difference of only $140.
If rates fall as far as MBA’s predictions—6.1% and the lowest among industry forecasts—the savings could be more notable. In that same scenario, the savings would be about $270 a month.
There could be more homes for sale—and slower price growth
The high mortgage rates of 2023 haven’t just stymied buyers. They’ve also kept existing homeowners stuck in place—80% of whom have current mortgage rates under 5%.
There’s hope that lower rates in 2024 could spur some of these homeowners to enter the market, thereby increasing listings and putting downward pressure on prices. But again, experts say the impact will likely be minimal (at least from a national perspective).
“Certainly, rates dropping will help to unlock some homeowners, especially those sitting on a ton of equity,” Kushi says. “But it won’t be sufficient to unlock the majority of existing homeowners.”
Fannie Mae currently projects a 4.1% increase in home prices by the end of next year (down from 5.7% price growth this year). In some competitive housing markets, though, the impact of more listings could be felt more significantly. In Dallas, for instance, Realtor.com is projecting an 8% fall in home prices next year; over 5% in San Francisco.
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If you’re financing a home with a mortgage, ensuring you get the best possible rate is one of the smartest financial moves you can make.
While it takes some legwork, the pay off is hard to argue with. Shaving even a fraction of a point from your rate can save you hundreds of dollars each month and tens of thousands over the life of the loan.
For example, with a $400,000 mortgage, dropping from a 7% to a 6.5% rate would save you almost $50,000 in interest over a 30-year term—roughly enough to pay for a year of private college.
Mortgage rates change constantly—and differ across mortgage companies. Here’s how to take advantage of those facts, compare current mortgage rates and get the best deal.
Current mortgage rates: How high are average mortgage rates right now?
WEEK ENDING
AVERAGE 30-YEAR FIXED RATE
AVERAGE 15-YEAR FIXED RATE
Dec. 28, 2023
6.61%
5.93%
Dec. 21, 2023
6.67%
5.95%
Dec. 14, 2023
6.95%
6.38%
Dec. 7, 2023
7.03%
6.29%
Nov. 30, 2023
7.22%
6.56%
Freddie Mac
Mortgage rates continued to cool in December, though averages remain high compared to recent years. According to mortgage-purchaser Freddie Mac, the average rate on 30-year fixed-rate mortgages fell from 7.22% at the start of the month to 6.61% today.
Rates dropped thanks to the Federal Reserve, which indicated cuts to its federal-funds rate—which mortgage rates generally follow—are likely come 2024. “This was a positive for mortgage rates, as we have seen them drop to a several-months low,” says Scott Haymore, who heads up mortgage pricing at TD Bank.
The drop in rates has spurred a modest increase in affordability for homebuyers. According to the Mortgage Bankers Association, the average new mortgage payment is now $2,137, down about $60 compared to November.
Still, rates are also a far cry from the record-low of 2.65% that came during the pandemic.
AVERAGE RATE
DATE
Current rate
6.61%
Dec. 28, 2023
This time last year
6.42%
Dec. 29, 20222
Highest point in last decade
7.79%
Oct. 26, 2023
All-time high
18.53%
Oct. 16, 1981
All-time low
2.65%
Jan 7, 2021
Freddie Mac
Where are mortgage rates headed?
Mortgage rates are influenced by many factors, including the economy, investments into mortgage-backed securities, the Treasury bond market, inflation and, perhaps most important in recent years, moves by the Federal Reserve.
Between March 2022 and July 2023, the Fed increased the federal-funds rate—the rate at which banks can borrow money—11 times. And over that period, 30-year mortgage rates jumped from under 4% to over 7%. (To be clear: The Fed doesn’t directly set mortgage rates. Its federal-funds rate and mortgage rates tend to move in the same direction, though.)
The Fed has recently been easing off those rate hikes, opting to keep rates as-is at the last three meetings. If inflation keeps dropping—it fell to 3.1% in November—Fed officials expect to make three potential rate cuts next year, though nothing is set in stone. This would likely mean further drops in mortgage rates, too.
MBA currently projects the average 30-year mortgage rate will fall to 6.1% by the end of 2024. Mortgage purchaser Fannie Mae expects rates to drop to 6.5% by year’s end. Both would be an improvement, but according to Haymore, it won’t do much for overall housing affordability.
“Housing inventory remains low and affordability is an issue for many potential homebuyers,” Haymore says. “Those challenges will continue—even with rates falling.”
How are mortgage rates set?
While the Fed influences mortgage rates, it is only one piece of the puzzle. Other external factors play a role, too—as do the details of your financial situation and loan choice.
Here’s what you need to know about what determines your mortgage rate.
External factors
The overall state of the economy is a big contributor to the path of mortgage rates. When the economy is strong, rates tend to be higher. When the economy sputters, rates drop.
“Interest rates often will rise or fall based on the strength of the economy, and ironically, bad news can be good news for lower interest rates,” says Bill Banfield, an executive at lender Rocket Mortgage.
This is due in part to how economic conditions impact investment activity. When there are geopolitical concerns or the economy is wavering, investors tend to flock to safer investments—which include things such as Treasury bonds and mortgage-backed securities. This pushes the yields on those securities down (yields fall when bond prices rise), taking mortgage rates down with them.
“When there is high demand for mortgage-backed securities, the prices of those MBS increase, which in turn can lower mortgage interest rates,” says Tanya Blanchard, founder of mortgage brokerage Madison Chase Capital Advisors. “This is because investors are willing to accept lower returns on their investments when the prices of MBS are high.”
Finally, inflation factors in, too—and not just because of the Fed reaction. It also increases the costs for lenders to originate loans, which drives their prices higher as well.
Personal factors
Your personal finances will factor into your interest rate as well. First, there’s your credit score. Mortgage lenders use this number to gauge your risk as a borrower—or how likely you are to default on your loan. The lower your score, the higher the rate you’ll need to pay to compensate for the perceived risk.
“Credit score is a very important consideration when applying for a mortgage,” Banfield says. “If someone has a proven track record of being responsible with their finances, they’ll be more likely to get a mortgage and a better rate.”
The size of your down payment is important, too. A larger down payment means you have more to lose, which hopefully discourages you from defaulting. Smaller down payments, on the other hand, mean more risk for the lender and higher rates for you as a result.
Loan-specific factors
Last but not least, the type of mortgage loan you choose will also influence your rate. Loans backed by the government, such as Federal Housing Administration-backed FHA loans and Veterans Affairs-backed VA loans, tend to have lower rates than conventional or jumbo loans since they come with the federal government’s protection. Shorter-term loans (15 years, for example) also have lower rates than longer-term ones (30 years).
As Goodwin explains, “While a shorter-term loan will come with a higher monthly payment, it could save you thousands on interest in the long run.”
How, when and why to compare mortgage rates from different lenders
Because every lender has different overhead costs, operating capacities and appetite for risk, mortgage rates can vary significantly from one company to the next. That’s why it’s important to consider several lenders before choosing where to get your loan.
Freddie Mac recommends getting at least four quotes (it could save you an average of $1,200 a year, apparently). Just make sure you’re not only going by the rates a lender advertises on their website or on third-party sites.
“Looking at advertised rates alone is not a good way to shop around,” Goodwin says. “Lenders typically display the lowest rates they offer as a headline to attract leads, but the actual rate you may be offered can vary dramatically depending on your own financial situation and the kind of loan you’re looking for.”
Many advertised rates also include mortgage points—meaning you would need to pay an extra upfront fee to snag it.
To get a rate that is truly a reflection of what you would pay as a borrower, you need to apply for preapproval. You’ll have to fill out an application and agree to a credit check for this. Once you’re done, you’ll get a loan estimate that will detail the total loan amount you are likely to qualify for, plus your interest rate and expected closing costs—or the fees required to originate, underwrite and close on your loan. Be sure to look at the APR, too—the annual percentage rate. This reflects the total annual cost of the loan, considering both your rate and any fees.
Be warned, though: The rates you’re quoted aren’t guaranteed until you lock your rate. A rate lock guarantees your interest rate for a set period—usually only 30 to 60 days, depending on the lender. You’ll typically do this once you’ve found a home and have a contract in place.
How to calculate your mortgage costs
Comparing mortgage offers might seem tedious, but financially, it’s usually worthwhile. Even a small change in rate can have a big impact on your monthly payment and long-term interest costs.
You can use a mortgage calculator to break down the exact costs or use your loan estimate. This should detail your monthly payment, your interest rate and your total interest paid in five years.
See the difference that incremental rate changes can make on the cost of a 30-year, $400,000 home loan below:
RATE
MONTHLY PAYMENT
INTEREST OVER 30 YEARS
5%
$2,147
$373,023
5.25%
$2,208
$395,173
5.50%
$2,271
$417,616
5.75%
$2,334
$440,344
6%
$2,398
$463,352
6.25%
$2,462
$486,632
6.50%
$2,528
$510,177
6.75%
$2,594
$533,981
7%
$2,661
$558,035
Keep in mind that most mortgage loans are amortized, meaning the total costs are calculated and then paid in even payments across the loan term. With these loans, you’ll pay more interest upfront and less toward the end of the term. For example, your first payment at 6% would see $2,000 go toward interest, while your final payment would have just $11.93.
“At the beginning of the loan term, the majority of the monthly payment will go toward interest,” says Colleen Bara, a lending executive with Key Bank. “As the loan is paid down, more of the monthly payment is allocated toward the pay-down of the principal balance.”
This means if you sell your home quickly after taking out your loan, you likely won’t have paid down your balance much—and may not make much from the home, profit-wise. If this is a concern, making an extra payment each year you’re in the house can help.
“Make one extra principal payment yearly and you can shave off approximately seven years of interest,” Blanchard says.
More on Mortgages
The advice, recommendations or rankings expressed in this article are those of the Buy Side from WSJ editorial team, and have not been reviewed or endorsed by our commercial partners.
If you spent your teenage years waiting anxiously for one of your siblings to get out of the shower, the idea of selling your spacious, multi-bathroom home and moving into a smaller house or condo may feel like a reversal of fortune.
Yet for many retirees, downsizing makes financial and practical sense. Younger baby boomers — those currently ranging in age from 57 to 66 — made up 17% of recent home buyers, while older boomers — ages 67 to 75 — accounted for 12%, according to a 2022 report from the National Association of Realtors Research Group. Boomers’ primary reasons for buying a home were to be closer to friends and family, as well as a desire to move into a smaller home, the report said. Both younger and older boomers were more likely than others to purchase a home in a small town, and younger boomers were the most likely to buy in a rural area.
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For retirees Fred and Shelby Bivins, selling their home in Green Valley, Ariz., will enable them to realize their dream of traveling in retirement. The Bivinses have put their 2,050-square-foot Arizona home on the market and plan to relocate to their 1,600-square-foot summer condo in Fish Creek, Wis., a small community about 50 miles from Green Bay. They plan to live in Wisconsin in the spring and summer and spend the winter months in a short-term rental in Arizona, where they have family.
Fred, 65, says the decision to downsize was precipitated by a two-month stay in Portugal last year, one of several countries they hope to visit while they’re still healthy enough to travel. “We’ve had Australia and New Zealand on our list for many years, even when we were working,” says Shelby, 68. The Bivinses are also considering a return visit to Portugal. Eliminating the cost of maintaining their Arizona home will free up funds for those trips.
With help from Chris Troseth, a certified financial planner based in Plano, Texas, the Bivinses plan to invest the proceeds from the sale of their home in a low-risk portfolio. Once they’re done traveling and are ready to settle down, they intend to use that money to buy a smaller home in Arizona. “Selling their primary home will generate significant funds that can be reinvested to support their lifestyle now and in the future,” Troseth says. “Downsizing for this couple will be a positive on all fronts.”
Challenges for downsizers
For all of its appeal, downsizing in today’s market is more complicated than it was in the past. With 30-year fixed interest rates on mortgages recently approaching 8%, many younger homeowners who might otherwise upgrade to a larger home are unwilling to sell, particularly if it means giving up a mortgage with a fixed rate of 3% or less. More than 80% of consumers surveyed in September by housing finance giant Fannie Mae said they believe this is a bad time to buy a home and cited mortgage rates as the top reason for their pessimism. “This indicates to us that many homeowners are probably not eager to give up their ‘locked-in’ lower mortgage rates anytime soon,” Fannie Mae said in a statement. As a result, buyers are competing for limited stock of smaller homes, says Hannah Jones, senior economic research analyst for Realtor.com.
Here, though, many retirees have an advantage, Jones says. Rising rates have priced many younger buyers out of the market and made it more difficult for others to obtain approval for a loan. That’s not an issue for retirees who can use proceeds from the sale of their primary home to make an all-cash offer, which is often more attractive to sellers.
Retirees also have the ability to cast a wider net than younger buyers, whose choice of homes is often dictated by their jobs or a desire to live in a well-rated school district. While the U.S. median home price has soared more than 40% since the beginning of the pandemic, prices have risen more slowly in parts of the Northeast and Midwest, Jones says. “We have seen the popularity of Midwest markets grow over the last few months because out of all of the regions, the Midwest tends to be the most affordable,” she says. “You can still find affordable homes in areas that offer a lot of amenities.”
Meanwhile, selling your home may be somewhat more challenging than it was during the height of the pandemic, when potential buyers made offers on homes that weren’t even on the market. The Mortgage Bankers Association reported in October that mortgage purchase applications slowed to the lowest level since 1995, as the rapid rise in mortgage rates has pushed many potential buyers out of the market. Sales of previously owned single-family homes fell a seasonably adjusted 2% in September from August and were down 15.4% from a year earlier, according to the National Association of Realtors. “As has been the case throughout this year, limited inventory and low housing affordability continue to hamper home sales,” NAR chief economist Lawrence Yun said in a statement.
However, because of tight inventories, there’s still demand for homes of all sizes, Jones says, so if your home is well maintained and move-in ready, you shouldn’t have difficulty selling it. “The market isn’t as red-hot as it was during the pandemic, but there’s still a lot to be gained by selling now,” she says.
Other costs and considerations
If you live in an area where real estate values have soared, moving to a less expensive part of the country may seem like a logical way to lower your costs in retirement. While the median home price in the U.S. was $394,300 in September, there’s wide variation in individual markets, from $1.5 million in Santa Clara, Calif., to $237,000 in Davenport, Iowa. But before you up and move to a lower-cost locale, make sure you take inventory of your short- and long-term expenses, which could be higher than you expect.
Selling your current home, even at a significant profit, means you will incur costs, including those to update, repair and stage it, as well as a real estate agent’s commission (typically 5% to 6% of the sale price). In addition, ongoing costs for your new home will include homeowners insurance, property taxes, state and local taxes, and homeowners association or condo fees.
Nicholas Bunio, a certified financial planner in Berwyn, Pa., says one of his retired clients moved to Florida and purchased a home that was $100,000 less expensive than her home in New Jersey. Florida is also one of nine states without income tax, which makes it attractive to retirees looking to relocate. Once Bunio’s client got there, however, she discovered that she needed to spend $50,000 to install hurricane-proof windows. Worse, the only home-owners insurance she could find was through Citizens Property Insurance, the state-sponsored insurer of last resort, and she’ll pay about $8,000 a year for coverage. Her property taxes were higher than she expected, too. When it comes to lowering your cost of living after you downsize, “it’s not as simple as buying a cheaper house,” Bunio says
Before moving across the country, or even across the state, you should also research the availability of medical care. “Oftentimes, those considerations are secondary to things like proximity to family or leisure activities,” says John McGlothlin, a CFP in Austin, Texas. McGlothlin says one of his clients moved to a less expensive rural area that’s nowhere near a sizable medical facility. Although that’s not a problem now, he says, it could become a problem when they’re older.
If you use original Medicare, you won’t lose coverage if you move to another state. But if you’re enrolled in Medicare Advantage, which is offered by private insurers as an alternative to original Medicare, you may have to switch plans to avoid losing coverage. To research the availability of doctors, hospitals and nursing homes in a particular zip code, go to www.medicare.gov/care-compare.
At a time when many seniors suffer from loneliness and isolation, a sense of community matters, too. Bunio recounts the experience of a client who considered moving from Philadelphia to Phoenix after her daughter accepted a job there. The cost of living in Phoenix is lower, but the client changed her mind after visiting her daughter for a few months. “She has no friends in Phoenix,” he says. “She’s going on 61 and doesn’t want to restart life and make brand-new connections all over again.”
Time is on your side
Unlike younger home buyers, who may be under pressure to buy a place before starting a new job or enrolling their kids in school, downsizers usually have plenty of time to consider their options and research potential downsizing destinations. Once you’ve settled on a community, consider renting for a few months to get a feel for the area and a better idea of how much it will cost to live there. Bunio says some of his clients who are behind on saving for retirement or have high health care costs have sold their homes, invested the proceeds and become permanent renters. This strategy frees them from property taxes, homeowners insurance, homeowners association fees and other expenses associated with homeownership
The boom in housing values has boosted rental costs, as the shortage of affordable housing increased demand for rental properties. But thanks to the construction of new rental properties in several markets, the market has softened in recent months, according to Zumper, an online marketplace for renters and landlords. A Zumper survey conducted in October found that the median rent for a one-bedroom apartment fell 0.4% from September, the most significant monthly decline this year.
In 75 of the 100 cities Zumper surveyed, the median rent for a one-bedroom apartment was flat or down from the previous month. (For more on the advantages of renting in retirement, see “8 Great Places to Retire—for Renters,” Aug.)
Aging in place
Even if you opt to age in place, you can tap your home equity by taking out a home equity line of credit, a home equity loan or a reverse mortgage. At a time when interest rates on home equity lines of credit and loans average around 9%, a reverse mortgage may be a more appealing option for retirees. With a reverse mortgage, you can convert your home equity into a lump sum, monthly payments or a line of credit. You don’t have to make principal or interest payments on the loan for as long as you remain in the home.
To be eligible for a government-insured home equity conversion mortgage (HECM), you must be at least 62 years old and have at least 50% equity in your home, and the home must be your primary residence. The maximum payout for which you’ll qualify depends on your age (the older you are, the more you’ll be eligible to borrow), interest rates and the appraised value of your home. In 2024, the maximum you could borrow was $1,149,825.
There’s no restriction on how homeowners must spend funds from a reverse mortgage, so you can use the money for a variety of purposes, including making your home more accessible, generating additional retirement income or paying for long-term care. You can estimate the value of a reverse mortgage on your home at www.reversemortgage.org/about/reverse-mortgage-calculator.
Up-front costs for a reverse mortgage are high, including up to $6,000 in fees to the lender, 2% of the mortgage amount for mortgage insurance, and other fees. You can roll these costs into the loan, but that will reduce your proceeds. For that reason, if you’re considering a move within the next five years, it’s usually not a good idea to take out a reverse mortgage.
Another drawback: When interest rates rise, the amount of money available from a reverse mortgage declines. Unless you need the money now, it may make sense to postpone taking out a reverse mortgage until the Federal Reserve cuts short-term interest rates, which is unlikely to happen until late 2024 (unless the economy falls into recession before that). Even if interest rates decline, they aren’t expected to return to the rock-bottom levels seen over the past 15 years, according to a forecast by The Kiplinger Letter. And with inflation still a concern, big rate cuts such as those seen in response to recessions and financial crises over the past two decades are unlikely.
Note: This item first appeared in Kiplinger’s Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.