Mortgage Rate Forecast: Will Rates Go Down in 2024?

Mortgage Rate Predictions for January 2024

At the start of 2023, economists predicted that mortgage rates would gradually decline throughout the year, but that forecast didn’t come true. In fact, rates trended higher, reaching a new peak of 7.79% in late October, according to Freddie Mac. Mortgage rates have pulled back in the weeks since then, defying expectations by plunging a full percentage point to around 6.7% by mid-December, although rates are still marginally higher than they were at the beginning of 2023.

The December Housing Forecast from Fannie Mae puts the average 30-year fixed rate at 7% during the first quarter of 2024, falling to 6.5% by year-end. This reflects a major downward revision in Fannie’s forecast: Just a month ago, the mortgage giant didn’t expect rates to dip below 7% until the second quarter of 2025. All told, Fannie Mae predicts mortgage rates will average 6.7% in 2024 and 6.2% in 2025.

“Clearly, the many economic forecasters who previously forecasted a recession beginning in 2023 were wrong, including us,” says Doug Duncan, Fannie Mae’s senior vice president and chief economist, in a Dec. 18 statement. “However, we continue to think there are reasons for concern that will likely lead to a mild economic downturn, including stretched consumer spending relative to personal incomes and the continued effects of restrictive monetary policy still working through the economy.”

The real estate listings website Realtor.com predicts in a 2024 Housing Market Forecast that rates will average 6.8% this year, dipping to 6.5% by the end of 2024.

“Although mortgage rates are expected to begin to ease, they are expected to exceed 6.5% for the calendar year,” the report reads. “This means that the lock-in effect, in which the gap between market mortgage rates and the mortgage rates existing homeowners enjoy on their outstanding mortgage, will remain a factor.”

The National Association of Realtors expects mortgage rates will average 7.5% in the first quarter of 2024, dropping to 6.9% in the second quarter, according to its latest Quarterly U.S. Economic Forecast. The trade association predicts that rates will continue to fall to 6.3% by the end of the year.

Lawrence Yun, chief economist at NAR, said during a November real estate summit that he thinks rates will be between 6% and 7% in spring 2024: “I believe we’ve already reached the peak in terms of interest rates. The question is: When are rates going to come down?”

In its December Mortgage Finance Forecast, the Mortgage Bankers Association predicts that mortgage rates will fall from 7% in the first quarter of 2024 to 6.1% by the fourth quarter. The industry group expects rates will fall below the 6% threshold in the first quarter of 2025.

“The November data on employment, inflation, and the December FOMC meeting all moved markets to sharply reduce interest rates, a clear positive for the pending spring homebuying market,” MBA chief economist Mike Fratantoni says in a 2024 outlook.

In its latest U.S. Economic Outlook, the Economics Group of Wells Fargo Bank puts the 30-year conventional mortgage rate at 6.85% in the first quarter of 2024, declining to 6% by the end of the year. Wells Fargo economists predict that rates will dip below 6% at the beginning of 2025.

Stubbornly high mortgage rates in 2023 were a byproduct of the Fed’s battle to bring annual inflation back to its 2% target amid positive economic growth, despite the pressures of rising interest rates. The central bank raised the federal funds rate seven times in 2022 and another four times in 2023, with the latest 25-basis-point rate hike coming at its July meeting.

But the tide turned in November, with economic data on inflation and the labor market pointing to a cooling economy. During the Fed’s December rate-setting meeting, policymakers voted to hold the rate steady at 5.25% to 5.5%, and it appears the central bank has finished its tightening cycle. Fed Chair Powell said at a Dec. 13 news conference that another rate hike is “not likely.”

In fact, the Fed released its updated projections materials, which show that three rate cuts are expected in 2024, bringing the rate down by three-quarters of a percentage point by the end of the year. NAR’s Yun anticipates the Fed will actually cut rates four times this year.

“While we believe that our policy rate is likely at or near its peak for this tightening cycle, the economy has surprised forecasters in many ways since the pandemic, and ongoing progress toward our 2% inflation objective is not assured,” Powell says. “We are prepared to tighten policy further if appropriate.”

But given the Fed’s projections and recent commentary, multiple rate cuts in 2024 seem more likely than not. Markets are pricing in an 89% probability of rate cuts by March, according to CME Group’s FedWatch Tool.

Another reason why mortgage rates are expected to fall is the abnormally large spread between the 30-year fixed mortgage rate and the yield on 10-year Treasury bonds. That spread is historically around 170 basis points, but it was closer to 300 basis points throughout most of 2023.

Treasury yields have moderated over the past month, and if spreads were to return to “normal,” mortgage rates would be under 6%. The spread probably won’t fall to 170 points anytime soon, but it is expected to retreat somewhat this year, which will help bring mortgage rates to the low-6% range.

“Mortgage-Treasury spreads remain wide but have dropped below 300 basis points recently,” says MBA’s Fratantoni. “We expect the spread will tighten closer to 250 basis points by the end of 2024.”

That’s not to say it will be a buyer’s market, but there should at least be some more balance between buyers and sellers. Buyers may be able to close the deal without having to waive important protections like home inspection and appraisal contingencies. What’s more, existing home inventory is forecast to improve (at least marginally) as rates drift lower and some previously rate-locked homeowners decide to sell.

Additionally, buyers may find less competition in the new home construction market. Homeowners may be reluctant to sell and sacrifice their low mortgage rates, but homebuilders remain eager to close the deal. Although new-construction homes are typically more expensive than resale homes, builders may be willing to offer other concessions like price reductions or temporary interest-rate buydowns.

Perhaps the biggest hurdle facing sellers is that they still need a place to live once they’ve sold their current home. For many, that means buying a new home at today’s rates and home prices. A June 2023 Redfin study found that 92% of homeowners with a mortgage have a rate below 6%, and nearly a quarter (24%) have a rate below 3%.

“Some (homeowners) simply don’t want to take on a 6%-plus mortgage rate, and some can’t afford to,” Taylor Marr, Redfin’s deputy chief economist, says in the report.

Although many prospective sellers would be hard-pressed to give up their sub-3% mortgage rate, Zillow predicts that the rate lock-in effect will wear off somewhat this year as some homeowners grow tired of waiting to move.

Plus, a recent Fannie Mae survey suggests that low rates aren’t the only factor keeping people from selling. While a fifth of mortgage borrowers (21%) say that their low mortgage rate is causing them to stay in their home for longer, nearly as many said they simply like their current home (19%). Perhaps unsurprisingly, 13% say they’re staying put because home prices are too high to buy another home.

However, there is a silver lining for sellers who are also buyers: Most homeowners who have been at their current home for at least a few years are sitting on a mountain of equity thanks to double-digit home price appreciation during that time. With a successful sale, homeowners can tap into that equity to put toward their next home purchase.

The forecast for mortgage refinance rates is pretty much the same as the forecast for mortgage purchase rates: They’re likely to decline this year, but they won’t return to pandemic-era lows anytime soon. Since most homeowners have a lower rate than what’s currently available, it doesn’t really make sense to try to refinance to a lower rate right now.

The vast majority (84%) of Americans who bought a home in the past year plan on refinancing to a lower rate in the future, according to a September U.S. News survey. Most of them plan on waiting until rates drop below 6%, which isn’t expected to happen until 2025; about a fifth (19%) will wait until rates fall below 5%, and that might not happen within the next three years.

Still, it’s possible to refinance if your goal isn’t just to get a lower rate. With rate-and-term refinancing, you can switch to a shorter repayment period, like a 15-year mortgage. Doing so can help you pay off your mortgage faster and save money in the long run, since you’ll be making fewer interest payments to the lender. Of course, if your new rate is much higher, it may not be worthwhile in the long term, and your monthly payments may be significantly more expensive in the short term.

Others may want to refinance as a way to switch from an adjustable-rate mortgage, or ARM, to a fixed-rate mortgage. Refinancing to a fixed rate can help shield you from higher monthly payments when the rate adjusts, which can make it easier to budget for your housing costs. However, fixed rates are generally higher than adjustable rates, so it may be difficult to justify a refinance unless your ARM rate is slated to increase meaningfully.

Additionally, some homeowners may want to refinance to access their home’s equity. A cash-out refinance is when you borrow a mortgage that’s larger than what you currently owe, allowing you to pocket your home’s equity in cash. This might be possible if your home’s value has risen dramatically or you’ve paid down your mortgage significantly over the past few years. But keep in mind that you’ll be taking on a larger loan amount and more debt, paying more money toward interest over time. Plus, you’ll still be stuck with a higher rate.