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Mortgage rates will spend the bulk of the year in the 6s, with movement below 6 percent confined to the back half of the year.— Greg McBride, Bankrate Chief Financial Analyst
Mortgage rates took homebuyers on a roller-coaster ride in 2023. In 2024, the journey should prove less jarring — and mostly downhill.
Greg McBride, Bankrate’s chief financial analyst, expects rates to fall gradually throughout the year, reaching 5.75 percent by the end of 2024.
“Mortgage rates will spend the bulk of the year in the 6s, with movement below 6 percent confined to the back half of the year,” says McBride.
The Mortgage Bankers Association forecasts a similar outlook for the end of 2024, projecting rates to slide to 6.1 percent. Fannie Mae, meanwhile, calls for rates to dip to 6.5 percent by year’s end, while Bright MLS, a real estate listing service in the Mid-Atlantic region, forecasts a decline to 6.2 percent.
A look back at mortgage rates in 2023
As of Dec. 27, 2023, the average rate for a 30-year fixed loan was 6.9 percent, according to Bankrate’s national survey of lenders. Compared to last year as a whole, that falls on the lower end. In February, the 30-year rate was as low as 6.27 percent. By October — as the U.S. economy defied expectations by staying out of recession — it rose all the way to 8.01 percent.
As it continued its work to tame inflation, the Federal Reserve issued rate hikes in the first half of 2023, which had a knock-on effect on mortgages.
As inflation cooled later in the year, the Fed opted not to raise rates at meetings in early November and mid-December, setting the stage for rate cuts in 2024. That new outlook sent mortgage rates down more than a full percentage point in the week following the Fed’s December meeting.
To be clear: Mortgage rates are set not by the Fed, but by investor appetite. That can lead to intense swings in mortgage rates — they soar on news of Fed hikes, then plummet in anticipation of a cut.
“It’s a little like saying ‘ice cream’ in front of the kids,” says McBride. “Investors get hyperactive when they hear ‘lower interest rates.’”
What to watch in 2024
Mortgage rates shot up in 2022 and 2023 because the economy was doing far better than expected. They’re falling now due to the consensus that the job market will cool, inflation will fade and the Fed will cut interest rates.
None of those are sure things, of course.
The main metric influencing fixed mortgage rates is the 10-year Treasury yield. Historically, mortgages have been priced about 2 percentage points higher than the yield.
As the Fed slashes rates next year, the 10-year should trend down, says McBride.
“The 10-year Treasury yield that serves as a baseline for fixed mortgage rates will have a bouncy journey lower, moving back above 4 percent early in 2024 but trending lower as inflation cools and the Fed gets closer to cutting rates,” says McBride. “For mortgage rates, that portends a general downtrend — albeit with fits and starts — in 2024.”
One factor keeping mortgage rates high that’s unlikely to change: the larger-than-usual gap between mortgage rates and the 10-year Treasury, an interval known as the spread. For decades, that gap has averaged about 2 percentage points. In the past year, it has been closer to 3 percentage points.
A more normal spread could knock a point off mortgage rates, but the central bank’s stance all but guarantees spreads will remain wider in 2024, says McBride.
“Since the Fed will maintain their quantitative tightening policy, the spread between mortgage rates and Treasurys will remain abnormally wide throughout the year,” says McBride.
Will lower rates help the housing market?
As mortgage rates soared, the housing market experienced a prolonged slump. The annual pace of home sales went from more than 6 million in early 2022 to less than 4 million in late 2023, according to the National Association of Realtors.
It’s possible that a drop in mortgage rates will spur new activity, both by enticing homebuyers back into the market and tempting sellers who have been reluctant to give up those 3 percent rates locked in during the pandemic.
Mortgage rates aren’t the only variable impacting homebuyers, however, and a decline might not be enough to ramp sales up significantly. The National Association of Realtors currently expects sales to total 4.71 million next year.
“Lower mortgage rates will provide a bit of relief for prospective homebuyers, but affordability issues will remain front and center with home prices at record highs,” says McBride. “The supply of homes available for sale — although a bit improved in 2024 — will continue to hamper sales and frustrate would-be buyers.”