(NerdWallet) – Mortgage rates are expected to go down sometime in 2024, but the decline probably won’t start in March. Instead, mortgage rates are likely to remain about the same because the economy hasn’t cooled off enough yet to cause them to fall.
When the economy grows robustly, and plenty of jobs are created, prices tend to go up. And when those three factors coexist, they combine to push interest rates higher. That’s what happened in February, and it’s unlikely that we’ll see a reversal of those trends in March.
A strong February leads into March
Rates went up in February, with the average rate on the 30-year mortgage at 6.78% in Freddie Mac’s weekly survey, up from 6.64% in January.
The culprit was a collection of strong economic data, released in February, that showed that the economy was running hot in late 2023 and into January. The overall economy grew at a 3.2% annual rate in the final three months of 2023. In January, the economy created a net 353,000 jobs and the core consumer price index accelerated. These signs of stronger-than-expected economic growth caused mortgage rates to rise in February.
Mortgage rates are unlikely to fall until there are unmistakable signs, for a few months in a row, that the economy is slowing down. We almost certainly won’t see those signs in March, despite two years’ toil by the Federal Reserve.
Eyes on the Fed
In an effort to slow the economy and get inflation under control, the Federal Reserve raised the overnight federal funds rate by 5.25 percentage points from March 2022 to July 2023. Inflation declined, as intended. The core CPI fell from 6.6% in September 2022 to 3.9% in January.
But inflation hasn’t fallen enough. The Fed’s goal is to reduce inflation to a 2% annual rate. The central bank will keep a floor under interest rates until inflation is unambiguously on the way to that 2% target. The Fed isn’t eager to cut the federal funds rate anytime soon.
This commitment was underscored by the title of a speech given Feb. 22 by Fed governor Christopher J. Waller: “What’s the Rush?”
Waller, who is a member of the Fed’s rate-setting Open Market Committee, said in his speech that the central bank must wait to verify that inflation is genuinely cooling off, “and this means there is no rush to begin cutting interest rates to normalize monetary policy.”
Usually Fed policymakers speak enigmatically, but sometimes they make themselves perfectly clear. That’s what Waller did with that speech. He sent an unmistakable signal that the Fed wouldn’t cut the federal funds rate at its March 20 meeting. With a rate cut off the table, there’s not much room for mortgage rates to fall in March.
Waller did say that he expects the Fed to cut short-term rates this year, but added, “the risk of waiting a little longer to ease policy is lower than the risk of acting too soon and possibly halting or reversing the progress we’ve made on inflation.” Therefore, there’s no rush.
Other mortgage rate forecasts
Fannie Mae, the Mortgage Bankers Association and National Association of Realtors predict that mortgage rates will gradually descend in 2024, to around 6% in the final three months of the year.
However, if the Fed keeps the federal funds rate unchanged through the first half of the year, don’t be surprised if forecasts are revised upward.
Looking back at February’s prediction
At the beginning of the month, I predicted that “mortgage rates might not change much in February.” Contrary to the prediction, mortgage rates did change in February: They started to rise in the first week and kept going up most of the month.
But the forecast served a purpose if it persuaded anyone to avoid waiting in vain for mortgage rates to fall in February.
I explained that rates “might remain relatively unchanged until markets believe the Fed is about to loosen monetary policy by cutting the federal funds rate.” That didn’t happen in February and it’s not going to happen in March.
Mortgage rates could fall in 2024, but that's not a given. The Mortgage Bankers Association projects a 6.5% rate by the end of the year, while Fannie Mae predicts 2024 will end with rates at 7%.
Mortgage rates are expected to go down in the second half 2024. Depending on which forecast you look at for housing market predictions in 2024, 30-year mortgage rates could end up between 6.5% and 7% by the end of the year.
The 30-year fixed mortgage rate is expected to fall to the mid-6% range through the end of 2024, potentially dipping into high-5% territory by the end of 2025. However, recent economic developments have led some forecasters to believe that rates will remain elevated at around 7% for the remainder of this year.
In summary, it is unlikely that mortgage rates in the US will ever reach 3% again, at least not in the foreseeable future. This is due to a combination of factors, including: Higher Inflation: Inflation is currently at a 40-year high in the US, and the Federal Reserve is raising interest rates to combat it.
The average 30-year fixed mortgage rate as of Friday is 6.91%. By the final quarter of 2025, Fannie Mae expects that to slide to 6.0%. While Wells Faro's model expects 5.8%, and the Mortgage Bankers Association estimates 5.5%.
The median projection for the benchmark federal funds rate is 5.1% by the end of 2024, implying just over one quarter-point cut. Through 2025, the FOMC now expects five total cuts, down from six in March, which would leave the federal funds rate at 4.1% by the end of next year.
The 10-year treasury constant maturity rate in the U.S. is forecast to decline by 0.8 percent by 2026, while the 30-year fixed mortgage rate is expected to fall by 1.6 percent. From seven percent in the third quarter of 2023, the average 30-year mortgage rate is projected to reach 5.4 percent in 2026.
Mortgage rates are expected to come down in 2024, and inventory and home sales are likely to increase. Homebuyers and sellers can also expect prices to continue to rise, albeit at a slower clip than the past couple of years.
'Lower interest rates would likely result in further modest declines in mortgage rates but how far depends on how low money markets see base rates falling. 'Economists currently expect base rates to fall to 3.5% by the end of 2025, which would imply mortgage rates remaining in and around the 4%+ range.
If you feel like you've received the best rate possible and fear a rate increase, lock it in now. But if you're willing to gamble that the rate will drop in the coming days or weeks, lenders could let you wait and provide a lock-in at a later date.
Currently, over six out of 10 purchase and refinance loans are at rates below 4%, according to Freddie Mac. Those ultra-low rates are unlikely to return anytime soon—if at all—resulting in limited motivation for many homeowners to refinance.
Inflation has receded, but the Fed has signaled it wants more positive data before pulling the trigger. In March 2024, the central bank predicted three quarter-point cuts by the end of the year. As time goes on, however, that has become less of a certainty.
According to Goldman Sachs, 99% of borrowers have a mortgage rate lower than 6% (or the current market rate). Of those, 28% locked in rates at or below 3% and 72% locked in rates at or below 4%. So if you took on a $700,000 mortgage with a 7% rate, your total monthly payment would be $4,657.
With a base rate cut in June 2024 now considered less likely, many experts believe it will happen in August instead. Although some believe the first base rate cut won't be until September. As a general rule: if interest rates fall, the mortgage rate forecast would be for mortgage rates to fall too.
Will mortgage rates come down in the next 5 years? Lord: “For the rest of 2023, I predict rates for the 30-year fixed-rate mortgage will average 7.3%, followed by 6.1% in 2024, 5.5% in 2025, 5% in 2026, 4.5% in 2027, and 4.5% in 2028.
Whether the base rate impacts your mortgage repayments or not will depend on the type of mortgage that you have taken out: A fixed-rate mortgage. A mortgage with a fixed interest rate means it won't be affected when the base rate goes up. If the base rate goes down, you won't pay any less, however.
According to the most recent Federal Reserve projections (made in December 2023), the median expectation is for three quarter-percentage-point cuts to the federal funds rate in 2024. Investors seem to be expecting the same.
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