Mortgage rates have seen significant fluctuation over the past couple of years. After hitting historic lows during the pandemic in 2020 and 2021, rates skyrocketed in 2022 and 2023 in response to aggressive interest rate hikes from the Federal Reserve aimed at taming soaring inflation. This volatility has created a cloud of uncertainty around where rates might go next.
Current Mortgage Rate Environment
In the first couple months of 2024, average 30-year fixed mortgage rates have hovered in the high 6% to low 7% range. According to Freddie Mac data, as of the week ending February 15, 2023, the average 30-year fixed rate stood at 6.77%.
This is down from north of 7% at points last year, but still roughly double the average of 3.5% borrowers enjoyed in early 2022. The higher rates we’re seeing now have significantly reduced buyers’ purchasing power and led to a cooldown in the real estate markets after the frenzy of the past couple years.
Factors Impacting Mortgage Rates
Mortgage rates are influenced by a variety of economic factors, most notably moves by the Federal Reserve. As the nation’s central bank, the Fed employs monetary policy tools like adjusting benchmark interest rates to promote maximum employment and stable prices for goods and services.
When the Fed raises its federal funds rate, it generally leads to higher long-term Treasury yields and consequently higher mortgage rates. The central bank aggressively hiked its policy rate from near zero in early 2022 to a range of 5.25% to 5.5% by the end of the year in an effort to reduce sky-high inflation. This caused mortgage rates to surge.
Rates also respond to inflation, employment data and overall U.S. economic performance. Last year’s red-hot inflation led investors to demand higher yields on government bonds, pushing up mortgage rates.
Cooling inflation readings toward the end of 2022 and into early 2024 have helped stabilize Treasury yields and mortgage rates. Rates also tend to be lower when economic growth slows, since weaker demand typically means softer inflation pressures.
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Mortgage Rate Forecast for 2024
Most experts believe mortgage rates have peaked for this cycle and will continue easing downward over the course of 2024, boosted by an increasingly accommodative Fed.
However, average 30-year fixed mortgage rates likely won’t fall below 6% this year. And while rates may dip lower in 2025, a return to the ultra-low levels of the past couple years seems unlikely anytime soon.
Here’s what some top housing economists and mortgage industry analysts predict for rates over the next couple years:
- The Mortgage Bankers Association expects the average 30-year fixed mortgage rate to end in 2024 at 6.1%, on its way to 5.5% by the end of 2025.
- Fannie Mae’s baseline forecast sees rates averaging 7% in the first quarter of 2024 before slowly declining to 6.5% by Q4 2024.
- Bank of America predicts “significant drops” in mortgage rates are unlikely until late 2024 at the earliest, with any Fed-driven declines likely to be gradual.
- The National Association of Realtors sees rates holding in the 6%–7% range for most of 2024 before falling below 6% at some point in 2025.
So while mortgage rates have room to decrease going forward, experts say meaningful relief for homebuyers likely won’t emerge until at least late 2024 or sometime in 2025.
How Lower Rates Could Impact Housing Affordability
The potential for lower average mortgage rates over the next couple years is certainly good news for buyers and would provide a boost to housing affordability. However, analysts caution that rate drops alone may not be enough to trigger a major improvement.
That’s because rates would need to fall significantly from where they are today to get back to levels that were considered rock bottom just a couple years ago. And even then, underlying affordability issues tied to low housing inventory and elevated home prices would remain.
Redfin chief economist Daryl Fairweather summed it up like this: “When rates come down, we’re going to be in store for another hot housing market where there are more buyers than sellers jacking up prices because we haven’t solved the problem of low inventory. It’s still that affordability problem. That’s going to stay with us.”
So while lower average mortgage rates in 2024 and 2025 would help, a meaningful shift in affordability also requires more homes available for sale. And with builders still facing supply chain disruptions, labor shortages and high construction costs, significantly ramping up inventory remains a challenge.
To Recap
In summary, while mortgage rates are off their 2022 highs, the average 30-year fixed rate remains well above 3% levels buyers enjoyed just a couple years ago. Ongoing volatility is expected through 2024 as the Fed attempts to carefully balance taming inflation without sparking a recession.
But analysts broadly predict mild easing for rates this year and next as inflationary pressures fade, which could reinvigorate housing demand. Just don’t expect a dramatic improvement or return to 2020/2021 lows anytime soon.
Even lower average mortgage rates ahead likely won’t fully offset broader affordability issues tied to limited inventory, elevated construction costs and still-high home prices. But if you find a home now that aligns with your budget and plans, don’t try to time the market based on unpredictable rate shifts alone.
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FAQs
Is 2024 a good time to refinance your mortgage?
The opportunity to refinance will depend largely on where your current rate stands relative to average rates today. Borrowers who locked rates below 5% likely won’t find worth refinancing yet. But if you purchased more recently when rates were over 7%, you may want to consider refinancing should averages fall back into the 5% range.
Generally, refinancing makes the most financial sense if you can lower your rate by at least 1 percentage point. Just make sure to weigh closing costs against potential savings to ensure you’ll recoup the fees within your expected timeframe for staying in the home.
As rates decline going forward, more borrowers are expected to refinance. The Mortgage Bankers Association predicts a 50% jump in refinance volume this year.
Should I buy a house now or wait for lower mortgage rates?
While mortgage rates are expected to trend lower over 2024 and 2025, trying to time homebuying around rate fluctuations is difficult. Rates can change daily and are influenced by many economic variables.
If you’re ready to purchase and find a home you love at a monthly payment you can afford, waiting indefinitely for some ideal rate environment may not be necessary. But if rates decline and you’re no longer comfortable with the payment or home prices, you always have the option to back out.
Remember that when mortgage rates fall, it often accelerates buyer demand and leads to higher prices. So try not to get fixated on rates alone. Focus instead on your overall budget and monthly payment comfort level to determine if now is the right time to buy.
Should I get a fixed- or adjustable-rate mortgage?
Fixed-rate mortgages remain the most popular option, accounting for over 90% of home loans. Their key advantage is rate and payment stability, providing certainty for budgeting. This remains appealing despite higher average fixed rates lately.
Adjustable-rate mortgages (ARMs) come with lower introductory rates that shift based on market indexes after an initial fixed-period. This introduces uncertainty but can mean a lower initial monthly payment. ARMs, however, are generally best suited for borrowers who plan a shorter homeownership tenure.
So weigh your timeframe for staying in the home against your desire for rate/payment consistency. Just recognize that experts see fixed rates coming down over the next couple years, while ARMs will see rates adjust upward during the same period.
