Mortgage Forecast: Will Rates Go Down in 2024?

Mortgage Rates Forecast for May 2024

Mortgage rates are expected to decline when the Federal Open Market Committee cuts the benchmark interest rate, which is likely to happen in the second half of 2024. But as long as inflation runs hotter than the Fed would like, rates will remain elevated at their current levels.

“An environment where rates continue to hover above seven percent impacts both sellers and buyers,” says Sam Khater, Freddie Mac’s chief economist, in a May 9 statement. “Many potential sellers remain hesitant to list their home and part with lower mortgage rates from years prior, adversely impacting supply and keeping house prices elevated. These elevated house prices add to the overall affordability challenges that potential buyers face in this high-rate environment.”

The May Housing Forecast from Fannie Mae puts the average 30-year fixed rate at or above 7% for the remainder of 2024. This reflects an upward revision in Fannie’s analysis: One month prior, the mortgage giant expected rates would fall to 6.4% by year-end, and just a few months ago, it forecasted rates would dip below 6% by the end of this year. All told, Fannie Mae predicts mortgage rates will average 7% in 2024 and 6.7% in 2025.

“For now, we see rates remaining closer to 7% through the end of the year – before trending downward in 2025 – but note potential downside to that forecast given recent actual movements in rates,” says Doug Duncan, senior vice president and chief economist at Fannie Mae, in a May 21 statement.

In its May Mortgage Finance Forecast, the Mortgage Bankers Association predicts that mortgage rates will fall from 6.9% in the second quarter of 2024 to 6.5% by the fourth quarter. The industry group expects rates will fall below the 6% threshold at the end of 2025.

“Fed officials have reiterated that they will still need to see several months of data indicating softening inflation before moving to an initial rate cut,” MBA economists say of the forecast. “We are expecting a first rate cut from the Fed in September of 2024 and two cuts this year.”

The National Association of Realtors expects mortgage rates will average 6.8% in the first quarter of 2024, rising to 7.1% in the second quarter, according to its latest Quarterly U.S. Economic Forecast. The trade association predicts that rates will fall in the second half of the year, reaching 6.5% in the fourth quarter.

“The bottom line for spring homebuyers is that mortgage interest rates may show little dramatic downward movement any time soon,” says Jessica Lautz, deputy chief economist and vice president of NAR Research, in an April 25 statement.

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.”

In its latest U.S. Economic Outlook, the Economics Group of Wells Fargo Bank puts the 30-year conventional mortgage rate at 7.05% in the second quarter of 2024, declining to 6.5% by the end of the year. Wells Fargo economists predict that the average rate will dip below 6% in the fourth quarter of 2025.

“Although we maintain our belief that the first rate cut will occur in September, we readily acknowledge that it would not take much for the start of the cutting cycle to be pushed back until November,” Wells Fargo researchers say in a May forecast update. “What’s more, the risks to that call are heavily skewed toward there being one cut in 2024 as opposed to three cuts.”

Stubbornly high mortgage rates in 2023 were a byproduct of the Fed’s battle to tame inflation to its 2% annual 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.

During the Fed’s May 2024 rate-setting meeting, policymakers voted again to hold the target range steady at 5.25% to 5.5%, and it appears the central bank has finished its tightening cycle. Fed Chair Jerome Powell said at a May 1 news conference that another rate hike is “unlikely,” but that policymakers are “prepared to maintain the current target range for the federal funds rate for as long as appropriate.”

The Fed’s latest projections materials released in March show that three rate cuts are still expected in 2024, bringing the rate down by three-quarters of a percentage point by the end of the year. However, the Fed’s economic policy isn’t set in stone. If the economy begins to show signs of heating up, policymakers may adjust their path accordingly.

But given the Fed’s projections and recent commentary, rate cuts in 2024 seem more likely than not, just not as soon as previously thought. At the beginning of the year, many economists believed rate cuts would begin in March – and then they thought May, then June at the earliest. Now, economists at Freddie Mac, the MBA and Wells Fargo predict that the FOMC will cut rates in September.

Another reason 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 few months, and if spreads were to return to “normal,” mortgage rates would be closer to 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 have narrowed with recent levels near 250 basis points, still wide relative to historical averages but much better than the 300 basis points experienced last year,” MBA economists say. “We expect the spread will tighten further by the end of 2024.”

Good things may come to those who wait, but patience doesn’t always pay off in the housing market. Two-thirds of homebuyers are waiting for mortgage rates to fall this year before buying a home, according to a March U.S. News survey. However, 67% of 2024 buyers put off purchasing a home in 2023 because they were holding out for lower rates – which didn’t come.

In fact, rates trended higher last year, reaching a new peak of 7.79% in late October, according to Freddie Mac, before plunging a full percentage point to around 6.6% by year-end. And in the first quarter of 2024, rates started rising amid unexpected economic strength, hovering around the 7% mark once again.

In the time that homebuyers have been holding out for lower rates, home prices have continued to rise. On a national basis, home prices increased 6.5% between March 2023 and March 2024, according to the S&P CoreLogic Case-Shiller Home Price Index. Home prices are expected to stabilize this year – but buyers shouldn’t expect them to come crashing down, at least not on a national level.

Here are a few 2024 home price forecasts from top U.S. housing groups:

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.

According to Federal Housing Finance Agency data, the average interest rate on existing mortgages is 4.1% – about three full percentage points below the current prevailing rate available to new homebuyers. In fact, 87% of homeowners have a rate below 6%, and rates aren’t expected to dip below that threshold this year.

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 2023 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 somewhat 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 exception would be recent homebuyers who borrowed when mortgage rates were high in 2022 and 2023. The vast majority (84%) of Americans who bought a home between September 2022 and September 2023 plan on refinancing to a lower rate in the future, according to a U.S. News survey. Most of them plan on waiting until rates drop below 6%; 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.