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.
Mortgage interest rates inched up this week, following nine straight declines totaling a decrease of 118 basis points (1.18%).
The average 30-year fixed rate mortgage (FRM) rose from 6.61% on Dec. 28 to 6.62% on Jan. 4, according to Freddie Mac.
“Given the expectation of rate cuts this year from the Federal Reserve, as well as receding inflationary pressures, we expect mortgage rates will continue to drift downward as the year unfolds,” said Sam Khater, Freddie Mac’s Chief Economist.
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Will mortgage rates go down in January?
Mortgage rates fluctuated significantly in 2023, with the average 30-year fixed rate going as low as 6.09% on Feb. 2 and as high as 7.79% on Oct. 26, according to Freddie Mac.
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The range can be largely attributed to the Federal Reserve’s ongoing fight against inflation, juxtaposed with uncertainty in the banking sector sparked by Silicon Valley Bank’s collapse. However, with duress permeating the financial market and the fallout from U.S. debt ceiling talks, the Fed may continue making hikes to bring interest rates down.
With the economy likely heading into a recession, it’s possible we’ve already seen the peak of this rate cycle. Of course, interest rates are notoriously volatile and could tick back up on any given week.
Experts from CoreLogic, Home Qualified, Realtor.com and others weigh in on whether 30-year mortgage rates will climb, fall, or level off in January.
Expert mortgage rate predictions for January
Craig Berry, branch manager at Acopia Home Loans
Prediction: Rates will moderate
“As inflation is the no. 1 item on the Federal Reserve’s radar right now, the Feds may choose not to lower the federal funds rate until inflation comes down. And, while Fed rate cuts aren’t a must-have in order for mortgage rates to come down, interest rates are affected by the federal funds rate.
The Feds continue to seek a balance between inflation and maximum employment so as not to cause significant damage to the economy which could trigger a recession. Recent momentum has been positive, and as long inflation cooperates, mortgage rates may see a slight decline in January. However, it isn’t likely that we’ll see significant drops to longer-term rates until we get further into 2024.”
Ralph DiBugnara, president at Home Qualified
Prediction: Rates will fall
“Rates finally shifted down some in December and stabilized lower. U.S. payrolls came in lower than anticipated, unemployment was up and building of new homes was down. These are good signs that inflation may have reached its peak and could trigger a lowering of rates. I expect the Fed to stay neutral for the time being and possibly through the first quarter of the year with possible cuts coming only if we see a drastic shift in the economy. For January, I believe the average 30-year fixed will land at 7.125% and the 15-year fixed will be 6.75%.”
Selma Hepp, chief economist at CoreLogic
Prediction: Rates will fall
“Mortgage rates should continue to decline, albeit very gradually and given there are no surprises with inflation. We should see rates fall below 7% mark.”
Hannah Jones, senior economic research analyst at Realtor.com
Prediction: Rates will fall
“If inflation and employment data continue to show signs of slowing, mortgage rates are likely to ease in January, though at a slower clip than in recent weeks. As incoming data confirms that the economy is indeed cooling, the upward pressure on mortgage rates will continue to let up and buyers will enjoy lower rates than in recent months.
However, if inflation or employment data come in stronger than expected, we could see rates pick up steam once again. Investors expect the Fed to hold steady at the current target rate in next week’s meeting, which would signal the Committee’s confidence in the current policy stance to bring inflation down to the target 2%. As inflation reaches the target level, mortgage rates will continue to drift lower.”
Jess Kennedy, COO at Beeline
Prediction: Rates will fall
“We expect rates to continue to ease as we kick off 2024. You can see the signaling of a rate cut from the Fed in many ways. For example, it is harder to find long-term CDs at the higher interest rates we were seeing 45-60 days ago). Publicly traded companies are also seeing their stock prices move higher on the expectation of rate relief in 2024. All these signs signal rates start to tick down even ahead of an official rate cut.”
Odeta Kushi, deputy chief economist at First American
Prediction: Rates will fall
“In light of favorable trends in inflation and labor market data, the Federal Reserve appears to be on a path towards its goals, although achieving its 2% inflation target will take some time. Consequently, the Fed is expected to maintain a restrictive stance, which will keep mortgage rates elevated. However, given slowing inflation and a cooling labor market, and barring any unforeseen developments, modest reductions in mortgage rates are possible in January.”
Rick Sharga, CEO at CJ Patrick Company
Prediction: Rates will fall
“With inflation moving in the right direction, wage growth slowing, and the jobs market softening a bit, it seems likely that the Federal Reserve has finished rate hikes for this cycle. That, coupled with weakening bond yields, should create an environment where mortgage rates can start a gradual, but steady decline throughout 2024. January rates for 30-year fixed-rate loans will probably straddle 7% — ranging from 7.1% to about 6.9% as the market finds its footing to begin the year.”
Mortgage interest rates forecast next 90 days
As inflation ran rampant in 2022, the Federal Reserve took action to bring it down and that led to the average 30-year fixed-rate mortgage spiking in 2023.
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With inflation gradually cooling, the Fed adjusted its policies with smaller and skipped hikes. Additionally, the economy showing signs of slowing has many experts believing mortgage interest rates will gradually descend in 2024.
Of course, rates could rise on any given week or if another global event causes widespread uncertainty in the economy.
Mortgage rate predictions for 2024
The 30-year fixed-rate mortgage averaged 6.62%% as of Jan. 4, according to Freddie Mac. All five major housing authorities we looked at project 2024’s first quarter average to finish above that.
The National Association of Home Builders sits at the low end of the group, predicting the average 30-year fixed interest rate to settle at 7.04% for Q1. Meanwhile, Fannie Mae had the highest forecast of 7.6%.
Housing Authority
30-Year Mortgage Rate Forecast (Q1 2024)
National Association of Home Builders
6.77%
Wells Fargo
6.85%
Fannie Mae
7.00%
Mortgage Bankers Association
7.00%
National Association of Realtors
7.50%
Average Prediction
7.02%
Current mortgage interest rate trends
Mortgage rates came down for the ninth consecutive week.
The average 30-year fixed rate increased from 6.61% on Dec. 28 to 6.62% on Jan. 4 The average 15-year fixed mortgage rate fell, going from 5.93% to 5.89%.
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Month
Average 30-Year Fixed Rate
December 2022
6.36%
January 2023
6.27%
February 2023
6.26%
March 2023
6.54%
April 2023
6.34%
May 2023
6.43%
June 2023
6.71%
July 2023
6.84%
August 2023
7.07%
September 2023
7.20%
October 2023
7.62%
November 2023
7.44%
December 2023
6.82%
Source: Freddie Mac
After hitting record-low territory in 2020 and 2021, mortgage rates climbed to a 23-year high in 2023. Many experts and industry authorities believe they will follow a downward trajectory into 2024. Whatever happens, interest rates are still below historical averages.
Dating back to April 1971, the fixed 30-year interest rate averaged around 7.8%, according to Freddie Mac. So if you haven’t locked a rate yet, don’t lose too much sleep over it. You can still get a good deal, historically speaking — especially if you’re a borrower with strong credit.
Just make sure you shop around to find the best lender and lowest rate for your unique situation.
Mortgage rate trends by loan type
Many mortgage shoppers don’t realize there are different types of rates in today’s mortgage market. But this knowledge can help home buyers and refinancing households find the best value for their situation.
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Which mortgage loan is best?
The best mortgage for you depends on your financial situation and your goals.
For instance, if you want to buy a high-priced home and you have great credit, a jumbo loan is your best bet. Jumbo mortgages allow loan amounts above conforming loan limits, which max out at $ in most parts of the U.S.
On the other hand, if you’re a veteran or service member, a VA loan is almost always the right choice. VA loans are backed by the U.S. Department of Veterans Affairs. They provide ultra-low rates and never charge private mortgage insurance (PMI). But you need an eligible service history to qualify.
Conforming loans and FHA loans (those backed by the Federal Housing Administration) are great low-down-payment options.
Conforming loans allow as little as 3% down with FICO scores starting at 620. FHA loans are even more lenient about credit; home buyers can often qualify with a score of 580 or higher, and a less-than-perfect credit history might not disqualify you.
Finally, consider a USDA loan if you want to buy or refinance real estate in a rural area. USDA loans have below-market rates — similar to VA — and reduced mortgage insurance costs. The catch? You need to live in a ‘rural’ area and have moderate or low income to be USDA-eligible.
Mortgage rate strategies for January 2024
Mortgage rates displayed their famous volatility in 2023. Uncertainty in the banking sector led to downtrends, but ongoing inflation battles, Fed hikes and a hot job market drove growth.
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At its September and November meetings, the central bank held off on a rate hike, preferring to see if the economy would keep cooling organically. In December, the FOMC skipped a hike and projected cuts for 2024. As always, the committee said it would adjust its policies as necessary — which could mean additional hikes or possibly none at all.
Here are just a few strategies to keep in mind if you’re mortgage shopping in the coming months.
Be ready to move quickly
Indecision can lead to failure or missed opportunities. That holds true in home buying as well.
Although the housing market is becoming more balanced than the recent past, it still favors sellers. Prospective borrowers should take the lessons learned from the last few years and apply them now even though conditions are less extreme.
“Taking too long to decide to make an offer can lead to paying more for the home at best and at worst to losing out on it entirely. Buyers should get pre-approved (not pre-qualified) for their mortgage, so that the seller has some certainty about the deal closing. And be ready to close quickly — a long escrow period will put you at a disadvantage.
And it’s definitely not a bad idea to work with a real estate agent who has access to “coming soon” properties, which can give a buyer a little bit of a head start competing for the limited number of homes available,” said Rick Sharga.
Buyer demand is lower than a typical year, but the market usually heats up in spring and summer. Being decisive (and prepared) should only play to your advantage.
Shopping around isn’t only for the holidays
Since interest rates can vary drastically from day to day and from lender to lender, failing to shop around likely leads to money lost.
Lenders charge different rates for different levels of credit scores. And while there are ways to negotiate a lower mortgage rate, the easiest is to get multiple quotes from multiple lenders and leverage them against each other.
“For potential home buyers, it’s important to get quotes from multiple lenders for a mortgage, as rates can vary dramatically, especially during such a volatile period,” said Odeta Kushi.
As the mortgage market slows due to lessened demand, lenders will be more eager for business. While missing out on the rock-bottom rates of 2020 and 2021 may sting, there’s always a way to use the market to your advantage.
How to shop for interest rates
Rate shopping doesn’t just mean looking at the lowest rates advertised online because those aren’t available to everyone. Typically, those are offered to borrowers with great credit who can put a down payment of 20% or more.
The rate lenders actually offer depends on:
Your credit score and credit history
Your personal finances
Your down payment (if buying a home)
Your home equity (if refinancing)
Your loan-to-value ratio (LTV)
Your debt-to-income ratio (DTI)
To figure out what rate a lender can offer you based on those factors, you have to fill out a loan application. Lenders will check your credit and verify your income and debts, then give you a ‘real’ rate quote based on your financial situation.
You should get three to five of these quotes at a minimum, then compare them to find the best offer. Look for the lowest rate, but also pay attention to your annual percentage rate (APR), estimated closing costs, and ‘discount points’ — extra fees charged upfront to lower your rate.
This might sound like a lot of work. But you can shop for mortgage rates in under a day if you put your mind to it. And shaving just a few basis points off your rate can save you thousands.
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Mortgage interest rate FAQ
What are current mortgage rates?
Current mortgage rates are averaging 6.62% for a 30-year fixed-rate loan and 5.89% for a 15-year fixed-rate loan, according to Freddie Mac’s latest weekly rate survey. Your individual rate could be higher or lower than the average depending on your credit score, down payment, and the lender you choose to work with, among other factors.
Will mortgage rates go down next week?
Mortgage rates could decrease next week (Jan. 8-12, 2024) if the mortgage market takes a cautious approach to a possible recession. However, rates could rise if lenders account for the Federal Reserve taking measures to counteract inflation or if a global event brings economic uncertainty.
Will mortgage interest rates go down in 2024?
If inflation continues to dissipate and the economy cools or goes into a recession, it’s likely mortgage rates will decrease in 2024. Although, it’s important to remember that interest rates are notoriously volatile and are driven by many factors, so they can rise during any given week.
Will mortgage interest rates go up in 2024?
Mortgage rates may continue to rise in 2024. High inflation, a strong housing market, and policy changes by the Federal Reserve have all pushed rates higher in 2022 and 2023. However, if the U.S. does indeed enter a recession, mortgage rates could come down.
What is the lowest mortgage rate right now?
Freddie Mac is now citing average 30-year rates in the 7% range. If you can find a rate in the 5s or 6s, you’re in a very good position. Remember that rates vary a lot by borrower. Those with perfect credit and large down payments may get below-average interest rates, while poor-credit borrowers and those with non-QM loans could see much higher rates. You’ll need to get pre-approved for a mortgage to know your exact rate.
Will there be a housing crash?
For the most part, industry experts do not expect the housing market to crash in 2023. Yes, home prices are over-inflated. But many of the risk factors that led to the 2008 crash are not present in today’s market. Low inventory and massive buyer demand should keep the market propped up next year. Plus, mortgage lending practices are much safer than they used to be. That means there’s not a subprime mortgage crisis waiting in the wings.
What is the lowest mortgage rate ever?
At the time of this writing, the lowest 30-year mortgage rate ever was 2.65%. That’s according to Freddie Mac’s Primary Mortgage Market Survey, the most widely used benchmark for current mortgage interest rates.
Should I lock my rate now or wait?
Locking your rate is a personal decision. You should do what’s right for your situation rather than trying to time the market. If you’re buying a home, the right time to lock a rate is after you’ve secured a purchase agreement and shopped for your best mortgage deal. If you’re refinancing, you should make sure you compare offers from at least three to five lenders before locking a rate. That said, rates are rising. So the sooner you can lock in today’s market, the better.
Is now a good time to refinance?
That depends on your situation. It’s a good time to refinance if your current mortgage rate is above market rates and you could lower your monthly mortgage payment. It might also be good to refinance if you can switch from an adjustable-rate mortgage to a low fixed-rate mortgage; refinance to get rid of FHA mortgage insurance; or switch to a short-term 10- or 15-year mortgage to pay off your loan early.
Is it worth refinancing for 1 percent?
It’s often worth refinancing for 1 percentage point, as this can yield significant savings on your mortgage payments and total interest payments. Just make sure your refinance savings justify your closing costs. You can use a mortgage calculator or speak with a loan officer to crunch the numbers.
How do I shop for mortgage rates?
Start by choosing a list of three to five mortgage lenders that you’re interested in. Look for lenders with low advertised rates, great customer service scores, and recommendations from friends, family, or a real estate agent. Then get pre-approved by those lenders to see what rates and fees they can offer you. Compare your offers (Loan Estimates) to find the best overall deal for the loan type you want.
What are today’s mortgage rates?
Mortgage rates are rising, but borrowers can almost always find a better deal by shopping around. Connect with a mortgage lender to find out exactly what rate you qualify for.
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1Today’s mortgage rates are based on a daily survey of select lending partners of The Mortgage Reports. Interest rates shown here assume a credit score of 740. See our full loan assumptions here.
Mortgage rates began dropping steadily in the last months of 2023, down to 6.61% for a 30-year, fixed-rate loan in the last days of the year, according to data from Freddie Mac.
But 85% of American homeowners remain locked into pre-pandemic mortgage rates of 5% and lower, making them hesitant to sell their home only to purchase another when both home prices and interest rates remain elevated.
Mortgage experts, however, predict that the market may shift in 2024, although not as dramatically as some would hope.
“Mortgage rates will fall to about 6.6% by the end of 2024. The gradual decline in rates combined with the small dip in prices will bring homebuyers some much-needed relief,” Redfin Chief Economist Daryl Fairweather told USA Today.
Jeff Taylor, founder and managing director at Mphasis Digital Risk, agreed that 30-year fixed rates will stay will in the “mid-6%” range.
National Association of Realtors chief economist Lawrence Yun made a bold prediction regarding the market. “A marked turn can be expected as mortgage rates have plunged in recent weeks,” he said.
However, even with interest rates falling, the lack of single-family homes on the market may keep prices elevated.
“While single-family housing starts have steadily increased throughout 2023, it will take years of accelerated new home construction to narrow the supply shortage gap from more than a decade of underbuilding,” Odeta Kushi, Deputy Chief Economist at First American, told USA Today.
Further, with existing homeowners refusing to sell because interest rates won’t match what they secured pre-pandemic, the housing shortage is destined to continue through 2024.
The rising costs of home insurance is also deterring new homebuyers, according to a recent Newsweek article. Real estate investors told the publication that it may be harder to get a mortgage in states like Florida, which is prone to extreme weather such as hurricanes, floods and tornadoes. If you can’t insure a home, you can’t secure a mortgage for its purchase. Current homeowners may experience rate hikes, too, but once a home is insured, it’s easier to maintain a policy than to write a new one.
California, Louisiana, Texas and Colorado also experienced rate hikes in 2023, as previously reported by GoBankingRates. Other states may be susceptible to future rate hikes, according to HUB Private Client research. These states include Minnesota, Missouri, Indiana and South Dakota, which is alarming as they were not previously considered areas at high-risk of weather-related claims.
But even with rising costs, 2024 could be the first year the U.S. sees an uptick in new home construction, as predicted by Robert Dietz, Chief Economist for the National Association of Home Builders.
“Due to low existing inventory, new construction has increased to approximately one-third of total single-family inventory in recent months when historically it was only 10% to 15%,” he said.
After declines in 2022 and 2023, the increase in new construction could help alleviate some of the housing shortage. But even an increased inventory of new homes won’t make a significant difference in the housing market for 2024. “Home prices keep marching higher,” Yun told USA Today. “Only a dramatic rise in supply will dampen price appreciation.
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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Mortgage rates dropped again this week, according to Bankrate’s national survey.
The average rate on 30-year fixed mortgages plummeted to 6.88 percent this week, down from 7.21 percent the previous week, according to Bankrate’s weekly national survey of large lenders.
The average rate on 30-year home loans topped 8 percent as recently as October. The sharp drop in mortgage rates came after the Federal Reserve said last week that it expects three rate cuts in 2024. The Fed’s long-awaited pivot was spurred by a number of factors, including a slowing job market and signs that the central bank’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 percent to less than 4 percent 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 latest meeting on Dec. 13, the Federal Open Markets Committee decided to leave rates unchanged. Now, economists say, it appears that the central bank is done raising rates.
“Slower inflation and financial markets anticipating the potential end of the Fed’s hiking cycle are both behind the recent decline in rates,” says Joel Kan, deputy chief economist at the Mortgage Bankers Association.
The sharp drop in mortgage rates eases the housing affordability squeeze. It also bodes well for a housing market that has been sluggish since 2022. “These lower rates will bring both active buyers and sellers into the market, eager to get out ahead of the traditionally busier spring market,” says Lisa Sturtevant, chief economist at Bright MLS, a listing service in the mid-Atlantic region.
What happened to mortgage rates this week
The 30-year fixed mortgages in this week’s survey had an average total of 0.32 discount and origination points. (Discount points are a way for borrowers to reduce the 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 6.99 percent. A year ago, the 30-year fixed-rate mortgage was 6.63 percent. Four weeks ago, that rate was 7.66 percent. The 30-year fixed-rate average for this week is 0.61 percentage points higher than the 52-week low of 6.27 percent.
As for other types of loans:
How mortgage rates affect home affordability
The national median family income for 2023 is $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 percent down payment and a mortgage rate of 6.88 percent, the monthly payment of $2,038 amounts to 25 percent of the typical family’s monthly income.
The sharp rise 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 by the end of 2023, but the strength of the U.S. economy has thrown a wrinkle into those predictions. Now, though, 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 September and November 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 — and as the central bank has boosted its policy rate from zero in early 2022 to a range of 5.25 percent to 5.5 percent now, mortgage rates have followed suit.
“There is room for mortgage rates to fall further,” Sturtevant says. “The gap between the 10-year Treasury yield and the 30-year fixed rate mortgage rate is historically around 180 basis points. While the gap has narrowed somewhat, the 30-year mortgage rate remains 280 basis points higher than the bond yield.”
Learn more about where rates could be headed in our December 2023 mortgage rate forecast.
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 percent. “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.
Mortgage rates dropped again this week, according to Bankrate’s national survey.
The average rate on 30-year fixed mortgages plummeted to 6.88% this week, down from 7.21% the previous week, according to Bankrate’s weekly national survey of large lenders.
The average rate on 30-year home loans topped 8% as recently as October. The sharp drop in mortgage rates came after the Federal Reserve said last week that it expects three rate cuts in 2024. The Fed’s long-awaited pivot was spurred by a number of factors, including a slowing job market and signs that the central bank’s ongoing war on inflation is working.
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Meanwhile, yields on 10-year Treasury bonds, an informal benchmark for 30-year mortgage rates, have dropped from 5% to less than 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 latest meeting on Dec. 13, the Federal Open Markets Committee decided to leave rates unchanged. Now, economists say, it appears that the central bank is done raising rates.
“Slower inflation and financial markets anticipating the potential end of the Fed’s hiking cycle are both behind the recent decline in rates,” says Joel Kan, deputy chief economist at the Mortgage Bankers Association.
The sharp drop in mortgage rates eases the housing affordability squeeze. It also bodes well for a housing market that has been sluggish since 2022. “These lower rates will bring both active buyers and sellers into the market, eager to get out ahead of the traditionally busier spring market,” says Lisa Sturtevant, chief economist at Bright MLS, a listing service in the mid-Atlantic region.
What happened to mortgage rates this week
The 30-year fixed mortgages in this week’s survey had an average total of 0.32 discount and origination points. (Discount points are a way for borrowers to reduce the 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 6.99%. A year ago, the 30-year fixed-rate mortgage was 6.63%. Four weeks ago, that rate was 7.66%. The 30-year fixed-rate average for this week is 0.61 percentage points higher than the 52-week low of 6.27%.
As for other types of loans:
—The 15-year fixed-rate mortgage was 6.21%, down from 6.57% from a week ago.
—The 5/6 adjustable-rate mortgage (ARM) was 6.95%, down from 7.1% a week ago.
—The 30-year fixed-rate jumbo mortgage was 6.93%, down from 7.19% a week ago.
How mortgage rates affect home affordability
The national median family income for 2023 is $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 6.88%, the monthly payment of $2,038 amounts to 25% of the typical family’s monthly income.
The sharp rise 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 by the end of 2023, but the strength of the U.S. economy has thrown a wrinkle into those predictions. Now, though, 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 September and November 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 — and as the central bank has boosted its policy rate from zero in early 2022 to a range of 5.25% to 5.5% now, mortgage rates have followed suit.
“There is room for mortgage rates to fall further,” Sturtevant says. “The gap between the 10-year Treasury yield and the 30-year fixed rate mortgage rate is historically around 180 basis points. While the gap has narrowed somewhat, the 30-year mortgage rate remains 280 basis points higher than the bond yield.”
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.
Mortgage rates dropped again this week, according to Bankrate’s national survey.
The average rate on 30-year fixed mortgages retreated to 7.23 percent this week, down from 7.41 percent the previous week, according to Bankrate’s weekly national survey of large lenders.
The recent reprieve could signal a prolonged drop in mortgage rates, housing economists say. The average rate on 30-year home loans in October topped 8 percent, but that’s changing because of a number of factors, including a slowing job market and signs that the Federal Reserve’s ongoing war on inflation is working.
“Part of it is the Federal Reserve is pausing on interest rate hikes,” says Lisa Sturtevant, chief economist at Bright MLS, a real estate listing service in the Mid-Atlantic region. “Of course, mortgage rates are affected by things other than what the Fed does. For example, mortgage applications are down, and lenders are competing for a shrinking pool of applicants.”
Meanwhile, yields on 10-year Treasury bonds, an informal benchmark for 30-year mortgage rates, have dropped from 5 percent to less than 4.2 percent 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 latest meeting on Nov. 1, the Federal Open Markets Committee decided to leave rates unchanged. Now, economists say, it appears that the central bank is done raising rates.
“Slower inflation and financial markets anticipating the potential end of the Fed’s hiking cycle are both behind the recent decline in rates,” says Joel Kan, deputy chief economist at the Mortgage Bankers Association.
What happened to mortgage rates this week
The 30-year fixed mortgages in this week’s survey had an average total of 0.29 discount and origination points. (Discount points are a way for borrowers to reduce the 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 6.97 percent. A year ago, the 30-year fixed-rate mortgage was 6.62 percent. Four weeks ago, that rate was 7.69 percent. The 30-year fixed-rate average for this week is 0.96 percentage points higher than the 52-week low of 6.27 percent.
As for other types of loans:
How mortgage rates affect home affordability
The national median family income for 2023 is $96,300, according to the U.S. Department of Housing and Urban Development, and the median price of an existing home sold in October 2023 was $391,800, according to the National Association of Realtors. Based on a 20 percent down payment and a mortgage rate of 7.23 percent, the monthly payment of $2,134 amounts to 27 percent of the typical family’s monthly income.
The sharp rise 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 by the end of 2023, but the strength of the U.S. economy has thrown a wrinkle into those predictions. Now, though, things finally seem to be cooling, especially 10-year Treasury yields.
Lawrence Yun, chief economist at the National Association of Realtors, expects mortgage rates to fall below 7 percent during the winter months. “I believe consumer price inflation will be much lower, and that will allow the Federal Reserve to cut interest rates,” says Yun.
Mortgage rates are also chained to inflation, a metric the Fed has been moving to control. At its September and November 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 — and as the central bank has boosted its policy rate from zero in early 2022 to a range of 5.25 percent to 5.5 percent now, mortgage rates have followed suit.
“There is room for mortgage rates to fall further,” Sturtevant says. “The gap between the 10-year Treasury yield and the 30-year fixed rate mortgage rate is historically around 180 basis points. While the gap has narrowed somewhat, the 30-year mortgage rate remains 280 basis points higher than the bond yield.”
Learn more about where rates could be headed in our December 2023 mortgage rate forecast.
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 percent. “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.
hikesterson/Getty Images; Illustration by Issiah Davis/Bankrate
After topping 8 percent in October, mortgage rates beat a hasty retreat in November. The average rate on 30-year loans fell under 7.5 percent in Bankrate’s most recent survey of lenders.
“Market sentiment has significantly shifted over the last month, leading to a continued decline in mortgage rates,” says Sam Khater, chief economist at mortgage company Freddie Mac.
One key reason for the reversal: Investors bid down 10-year Treasury yields, the main indicator for 30-year fixed mortgage rates.
Another factor is inflation, which was down to 3.2 percent for October. While that’s still above the Federal Reserve’s official target of 2 percent, forecasters think the Fed is done raising rates, a shift that will relieve some of the pressure on mortgages.
“If the Fed signals an end to interest rate hikes and takes on a dovish tone, there may be some downward pressure on mortgage rates,” says Odeta Kushi, economist at title insurer First American. “But don’t expect any large declines in mortgage rates until inflation is much closer to the Fed’s 2 percent target or there’s a decline in economic activity.”
Mortgage rate predictions December 2023
The downward momentum in mortgage rates will be sustained, albeit modestly, as the Federal Reserve signals they are done raising interest rates and projects slower inflation in 2024. Cautious projections from the Fed about the timing of rate hikes, along with the elevated volume of Treasury issuance, will be offsetting factors that limit the extent of decline in mortgage rates.
— Greg McBride, Bankrate Chief Financial Analyst
Many forecasts now call for rates to stick in the 7 percent range, either at 7.5 or higher.
“While mortgage rates have trended down from their peak in October, they remain above 7 percent and will likely stay there for some time,” says Ruben Gonzalez, chief economist at real estate brokerage Keller Williams.
As inflation cools and the Federal Reserve stands down, rates should drift down to 7 percent, says Lisa Sturtevant, chief economist at Bright MLS, a real estate listing service in the Mid-Atlantic region.
“Part of it is the Federal Reserve is pausing on interest rate hikes,” says Sturtevant. “Of course, mortgage rates are affected by things other than what the Fed does. For example, mortgage applications are down, and lenders are competing for a shrinking pool of applicants.”
Current mortgage rate trends
After rising sharply through late October, mortgage rates have trended back down. The average rate on a 30-year mortgage was 7.4 percent as of Nov. 29, according to Bankrate’s survey. This represents a departure from 8.01 percent on Oct. 25.
Bankrate’s weekly mortgage rate averages differ slightly from the statistics reported by Freddie Mac, the government-sponsored enterprise that buys mortgages and packages them as securities. Bankrate’s rates tend to be higher because they include origination points and other costs, while Freddie Mac removes those figures and reports them separately. However, both Bankrate and Freddie Mac report similar overall trends in mortgage rates.
When will mortgage rates go down?
While the experts we talked to don’t expect rates to come down significantly this month, they do forecast an eventual easing in 2024. The Mortgage Bankers Association projects rates to fall to 6.1 percent late next year. The National Association of Realtors estimates rates will be at 6.3 percent in a year, while Fannie Mae forecasts they’ll be at 7.1 percent.
Still, mortgage rates aren’t easy to predict.
“A lot of us forecasted we’d be down to 6 percent at the end of 2023,” says Sturtevant. “Surprise, surprise, we’re not.”
One wild card has been the unusually large gap between mortgage rates and 10-year Treasury yields. Normally, that spread is about 1.8 percentage point, or 180 basis points. This year, the gap has been more like 280 basis points, pushing mortgage rates a full percentage point higher than the 10-year benchmark indicates.
“There is room for that gap to narrow,” says Sturtevant, “but I’m not sure we’ll get back to those old levels. In this post-pandemic economy, the old rules don’t seem to apply in the same ways. We’re sort of figuring out what the reset is. Investors have a different outlook on risk now than they did before the pandemic. We’re just in this weird transition economy.”
What to do if you’re getting a mortgage now
Mortgage rates are at generational highs, but the basic advice for getting a mortgage applies no matter the economy or market.
Improve your credit score. A lower credit score won’t prevent you from getting a loan, but it can make all the difference between getting the lowest possible rate and more costly borrowing terms. To help qualify for a conventional mortgage, you’ll generally need a score of 620 or higher. However, the best mortgage rates go to borrowers with the highest credit scores, usually at least 740. In general, the more confident the lender is in your ability to repay the loan on time, the lower the interest rate it’ll offer.
Save up for a down payment. Putting more money down upfront can help you obtain a lower mortgage rate, and if you have 20 percent, you’ll avoid private mortgage insurance (PMI), which adds costs to your loan. If you’re a first-time homebuyer and can’t cover a 20 percent down payment, there are specific loans, grants and programs that can help. The eligibility varies by program, but often are based on factors like your income.
Understand your debt-to-income ratio. Your debt-to-income (DTI) ratio compares how much money you owe to how much money you make, specifically your total monthly debt payments against your gross monthly income. Not sure how to figure out your DTI ratio? Bankrate has a calculator for that.
Check out different mortgage loan types and terms. A 30-year fixed-rate mortgage is the most common option, but there are shorter terms. Adjustable-rate mortgages have also regained popularity recently.
FAQ
It might seem like a bank or lender are dictating mortgage terms, but in fact, mortgage rates are not directly set by any one entity. Instead, mortgage rates grow out of a complicated mix of economic factors. Lenders typically set their rates based on the return they need to make a profit after accounting for risks and costs.
The Federal Reserve doesn’t directly set mortgage rates, but it does set the overall tone. The closest proxy for mortgage rates is the 10-year Treasury yield. Historically, the typical 30-year mortgage rate is about 2 percentage points higher than the 10-year Treasury yield. In 2023, that “spread” has been more like 3 percentage points.
Mortgage rates have jumped to 23-year highs, so not many borrowers are opting to refinance their mortgages in late 2023. However, if rates come back down in the near future, homeowners could start looking to refinance.
Deciding when to refinance is based on many factors. If rates have fallen since you originally took out your mortgage, refinancing might make sense. A refi can also be a good idea if you’ve improved your credit score and could lock in a lower rate or lower fees. A cash-out refinance can accomplish that as well, plus give you the funds to pay for a home renovation or other expenses.
Mortgage rates hitting a century-high of 8% this month has left economists, homeowners, and prospective borrowers alike wondering when (or whether) the market will let up. Capital Economics doesn’t expect mortgage rates to fall significantly anytime soon—how does 6% or higher through the end of 2025 sound?
The London-based research firm, known for its housing market forecasting, released a revised mortgage rate forecast on Thursday, showing it’s unlikely that mortgage rates will fall below 6% before the end of 2025. Thomas Ryan, the new U.S. property economist for Capital Economics, tells Fortune: While the firm has “kept the same path for mortgage rates that we had in our previous forecast, we’ve shifted up our anticipated path for mortgage rates.”
That’s going to continue to have an adverse effect on housing affordability in the U.S., which is already at abysmal levels with high home prices and mortgage rates and declining inventory levels.
“Our new higher forecasts for U.S. Treasury yields mean that mortgage rates won’t fall as quickly as we previously predicted,” Ryan wrote in the new forecast. “While we still expect mortgage rates to decline, they are unlikely to fall below 6% before end-2025, muting any recovery in house purchase demand and sales volumes.”
By the end of 2023, Capital Economics predicts the mortgage rate will be 7.5% (versus 6.75% in its previous forecast), and drop to 6.25% by the end of 2024 (versus 5.25% in its previous forecast), Ryan says. It won’t be until the end of 2025 that we’ll see 6% mortgage rates, predicts Capital Economics, which had previously penciled in a 5% rate by the end of that year.
Higher mortgage rates tied to higher Treasury yields
The firm’s new forecast is tied to higher forecasts for U.S. Treasury yields, which affect mortgage rates. The 30-year fixed mortgage rate is “loosely benchmarked” to the 10-year Treasury bond, Odeta Kushi, deputy chief economist at Fortune 500 financial services company First American, wrote in a report this year, meaning that mortgage lenders tie their interest rates to bond rates. Historically, the spread between the 30-year fixed mortgage rate and the 10-year Treasury bond yield has been 1.7 percentage points (typically expressed as 170 basis points or bps).
“In simple terms, mortgage rates are priced directly from the yield on mortgage-backed securities (MBS), which is a bundle of home loans sold as an asset,” Ryan tells Fortune. “When Treasury yields rise, lenders require higher yields on their mortgage-backed securities to attract investors that want to earn a higher return than the risk-free rate, which in turn pushes mortgage rates up.”
Today, the spread is at more than 300 bps with the U.S. Treasury yields briefly touching 5% this week for the first time since 2007. This, in turn, has pushed mortgage rates to their highest point since November 2000, “and is higher than we had anticipated them to go,” Ryan wrote.
When we can really expect to see rates fall
However, Capital Economics does predict that mortgage rates will fall faster than Treasury yields, albeit slowly. In 2024, the firm predicts, the 10-year yield will drop 75 bps to 3.75%, compared with a 125 bps fall in mortgage rates, Ryan says.
The firm also predicts that the U.S. Treasury yields will “fall sharply” from here and that the Fed will abandon its “higher-for-longer rhetoric” and cut interest rates next year. Even with strong GDP growth this quarter, Capital Economics expects that growth to slow—and even decline soon.
“That weakness, together with further signs of improvement in core inflation, which has already been falling since the back end of 2022, is why we expect the Fed to cut rates more aggressively next year than current market pricing assumes,” Ryan says. “As outlined in the report, that will put downward pressure on Treasury yields and mortgage rates.”
Other real estate experts and financial institutions tend to agree that we’ll continue to see relatively high mortgage rates—at least compared with the sub-3% rates of the pandemic—throughout the next couple of years. Goldman Sachs also released its forecast this week, predicting “sustained higher mortgage rates,” not dipping below 7% until the end of next year.
Other housing market experts are doubtful we’ll ever enjoy the mortgage rates of the pandemic era again.
Mortgage rates “will never return to the 2%-to-3% range they were previously,” Rhett Wiseman, a private real estate investor who owns and has invested in more than 200 residential properties in the Northeastern and Midwestern markets, previously told Fortune. In other words, the frozen housing market, with people holding on to their sub-3% rates, could be with us for a long time to come.
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Mortgage rates eased back down this week, but remain above 7%, which is prohibitively high for many homebuyers.
The average rate on the 30-year fixed mortgage declined to 7.18% this week from 7.23% the week before, according to Freddie Mac. This marks the third straight week rates have been above 7%, the first time that’s happened since April 2002.
Elevated rates are colliding with the end of the traditional homebuying season, but the environment remains a major headwind for those buyers left in the market and further cements many homeowners’ decisions to not sell now.
“The impact of mortgage rates on activity right now might not be all that big because activity is expected to slow down,” Zillow senior economist Orphe Divounguy told Yahoo Finance. “The housing market is very seasonal so it’s expected to slow down right now and pick back up in the spring.”
Buyer demand still low
Buyers still in the market took advantage of the somewhat softer rate.
Mortgage application volume for purchases picked up 2% last week on a seasonally adjusted basis, compared with the previous week, the Mortgage Bankers Association (MBA) survey for the week ending Aug. 25 found.
“Treasury yields peaked early in the week and did move lower by the end, which may have spurred some activity,” MBA deputy chief economist Joel Kan said in a statement. Fixed mortgage rates tend to follow the direction of the 10-year Treasury yield.
Still, demand remains low, Kan said, with volumes off 27% from the same time last year.
Adding to the affordability concerns are home prices, which have been pushed up by solid demand and sparse inventory.
In June, home prices rose for the fifth consecutive month, according to the S&P Case-Shiller US National Composite home price index, which is off just 0.02% from its all-time peak a year ago.
Reluctant homeowners
Mortgage rates are also to blame for the shortage in homes for sale.
Most homeowners have a mortgage rate far below the prevailing rate. According to the Bureau of Economic Analysis, the average rate on all outstanding mortgage debt was 3.59% in the second quarter, nearly half the 7.18% rate recorded this week.
“For the bulk of those who already have a mortgage, a new mortgage at current rates would incur significantly higher costs,” Jake Gordon, research analyst at Bespoke Investment Group, wrote in a note following the BEA’s revised data release on Wednesday.
“That gives them little reason to enter the housing market, and thus, is part of the reason for the dearth in housing inventories,” the analyst added.
New homes to the rescue
With little on the resale market, some buyers have turned to new homes.
New construction now made up nearly 31% of the for-sale inventory pie in July, up from around 20% in the years from 2000 until the pandemic, according to analysis from Odeta Kushi, First American’s deputy chief economist.
As a result, builders have ramped up construction and incentives. A prevalent perk is paying for mortgage rate buydowns for prospective buyers.
For instance, some new buyers are getting mortgage rates below 6% as builders allocate 4%-6% of the home sale proceeds toward buying down the mortgage rate, data from John Burns Research & Consulting shows.
“As mortgage rates swing between the low- and mid-7% range, we could see this uncertainty around rates have more of a cooling effect on sales,” Eric Finnigan, vice president of research and demographics at John Burns Research and Consulting, told Yahoo Finance.
Mortgage rate forecast
Where mortgage rates go from here remains to be seen.
“Recent volatility makes it difficult to forecast where rates will go next, but we should have a better gauge in September as the Federal Reserve determines their next steps regarding interest rate hikes,” Sam Khater, Freddie Mac’s chief economist, said in a statement.
The increase in rates is largely because the yield on the 10-year Treasury has skyrocketed over the past 18 months as the Federal Reserve tries to tamp down inflation to its 2% goal.
Read more: What the latest Fed rate hike plan means for mortgage rates and loans
The Fed’s preferred inflation reading slightly ticked up on annual basis in July, according to a government release on Thursday, overturning some of the prior month’s drop as the battle to bring down inflation could be slower.
Last week, Federal Reserve Chairman Jerome Powell warned in his Jackson Hole speech that inflation still remains too high, suggesting that the central bank isn’t done.
“Additional evidence of persistently above-trend growth could put further progress on inflation at risk and could warrant further tightening of monetary policy,” Powell said, also noting that home prices are still going up, even after 11 rate hikes.
“In addition, after decelerating sharply over the past 18 months, the housing sector is showing signs of picking back up.”
—
Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv.
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