Mortgage rates have been rising sharply in recent weeks as persistently high inflation has all but evaporated hopes that the Federal Reserve would begin cutting rates this summer. As a result, buyers will likely face higher mortgage rates through the crucial spring home-buying season.
But it's not all bad news, especially if you're not in a rush to buy: In fact, most experts expect mortgage rates to fall later this year.
“The pandemic was too hot, but 2023 was too cold,” said Odeta Kusi, deputy chief economist at First American Financial Corp., a provider of real estate insurance and settlement services. Rates in 2024 “are not going to be at exactly the right level, but they will be on the path to normalization.”
Mortgage rates rose for much of 2023, reaching nearly 8% at one point, a level not seen in 20 years, before falling back to near 6.5%. Well into 2024, mortgage rates are now above 7% after a small dip in early March. Still, most economists believe mortgage rates will reverse again this year, even if only slightly. If these predictions come true, the question is when rates will fall, and whether it will be enough to change home affordability in the right direction.
Will mortgage rates fall and stay that way?
The general consensus among industry experts is that mortgage rates will gradually decline in the fourth quarter of 2024. But the rate of decline has slowed in recent months. For example, earlier this year Fannie Mae projected rates would fall to 5.8%. The mortgage buyer has since revised its forecast to 6.4%. Trade group the Mortgage Bankers Association has also revised its rate forecast upward.
Here's what experts predict will happen to mortgage rates by the end of the year, and how their predictions have changed in recent months.
Change from forecast at the beginning of the year 30-year mortgage rate forecast through the end of the year (latest forecast) Mortgage Bankers Association +0.3% 6.4% Fannie Mae +0.6% 6.4% Realtor.comn/a6.5% Redfinn/a6.5%
According to Freddie Mac, the average interest rate on a 30-year fixed-rate mortgage at the end of 2023 will be 6.61%, and has remained in the mid-6% to low 7% range ever since. This is around average historically, and while rates have fallen slightly since peaking at 7.79% in October of last year, rates this high would have been unthinkable just a few years ago.
In 2020 and 2021, the Federal Reserve kept short-term interest rates near zero to stimulate the pandemic-hit economy, with mortgage lenders offering rates below 3%. This spurred demand for mortgages from homebuyers as well as homeowners looking to refinance their existing loans. But when the Federal Reserve began raising interest rates in March 2022 to combat inflation, mortgage lenders reversed course. As a result, mortgage costs have risen steadily, home sales have slowed, and refinance demand has virtually vanished.
Going into 2024, inflation was trending downwards, and the Fed had signaled that a rate cut was on the horizon. But since then, inflation has risen for two consecutive months, forcing the Fed to keep interest rates higher for a longer period. Wall Street investors expect this trend to continue over the next few Fed meetings, potentially leading to a rate cut after September. Fed policymakers have also signaled they plan to keep interest rates high for as long as necessary to keep inflation in check.
The Fed doesn't set mortgage rates, but lenders tend to follow the central bank's lead. “Our model is calling for a slow and steady decline,” says Daniel Hale, chief economist at Realtor.com. (Realtor.com is run by News Corp., parent company of The Wall Street Journal.) “This assumes that inflation improves consistently over the coming months.”
Mortgage interest rates and repayment ability
Lower interest rates will lower new mortgage payments, but buyers still can't expect a significant improvement in home affordability, especially with rising home insurance costs.
For example, on a $500,000 loan, a 7% interest rate would mean your monthly mortgage payment would be just over $3,300. With Realtor.com's projected year-end interest rate of 6.5%, your payment would drop to $3,160 – a difference of just $140.
Let's look at how your payment would change based on a small change in mortgage interest rates.
Monthly principal and interest payments on a $500,000 loan with interest rate of 7.00%$3,3266.75%$3,2426.50%$3,1606.25%$3,0786.00%$2,9975.75%$2,9175.50%$2,8385.25%$2,7615.00%$2,684
To make a significant difference in home affordability for most buyers, interest rates would need to fall much more than industry forecasts currently predict — the current minimum rate forecast is 6.4%.
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