The housing market has been on a rollercoaster ride recently, and it’s caught the attention of homeowners, buyers, and experts alike. 

Let’s take a closer look at the dynamics of mortgage rates, what’s driving the changes, and what you might expect in the coming months.

Tracking Mortgage Rates

Mortgage rates, those crucial numbers determining how much you pay for your home loan, have recently experienced dramatic shifts. In October 2023, they reached a high of 7.79%, sending waves of concern through the real estate market. 

Since then, mortgage rates have cooled off significantly. This cooling trend has come after several important developments, including signs of inflation pressures receding and promising signals from the Federal Reserve.

The rate drop is a welcome development for homeowners and prospective buyers. According to Freddie Mac, the average 30-year fixed mortgage rate plummeted by a significant 28 basis points, settling at 6.67% by the end of the week on December 21. In case you don’t know, a basis point is one-hundredth of one percentage point.

These recent developments have elicited reactions from experts and analysts. Sam Khater, the chief economist at Freddie Mac, expressed optimism about the downward trend, stating that the 30-year fixed-rate mortgage remained below 7% for the second consecutive week, marking a welcome departure from the 17-week streak above the 7% mark.

While this rate drop certainly appears promising for a housing market stuck in a rut, experts remain cautious. High mortgage rates and home prices are still expected to create challenging conditions for both buyers and sellers in 2024.

The Federal Reserve’s Impact on the Housing Market

One of the key factors influencing mortgage rates is the Federal Reserve’s decisions regarding the benchmark federal funds rate. This rate, which is the overnight borrowing rate for commercial banks and credit unions, indirectly impacts mortgage rates. In the final meeting of 2023, the Federal Open Market Committee (FOMC) decided to leave the benchmark rate unchanged, maintaining it within the range of 5.25% to 5.5%.

This decision marked the third consecutive meeting in which the FOMC opted not to raise rates, suggesting that the era of rate hikes may end this cycle. 

Federal Reserve Chairman Jerome Powell reiterated that inflation remained above the Fed’s long-term target rate of 2%. Still, the release of updated economic projections indicated a lower rate range for 2024, including the possibility of three rate cuts by year’s end. This implies that rate hikes are likely over for the foreseeable future.

Expert Predictions for 2024

So, what do these developments mean for mortgage rates in 2024? 

Danielle Hale, chief economist at Realtor.com, believes that “mortgage rates will continue to ease in 2024 as inflation improves and Fed rate cuts get closer.” She predicts that mortgage rates could approach 6.5% by the end of the year, which would be a significant factor in providing relief to homebuyers.

The recent history of mortgage rates has been marked by sharp increases, driven by the Fed’s aggressive interest rate policies to curb inflation. However, in recent times, rates have been on a steady decline, thanks to the Fed’s rate-hike pauses and cooling economic data.

This decline has not gone unnoticed in the housing market. Refinance activity, which had been slow over the past year, is showing signs of life as mortgage rates continue to drop, according to data from the Mortgage Bankers Association.

Experts believe that when the Fed eventually cuts rates in 2024, refinance activity will increase even more. Borrowers who are locked in high mortgage rates may seize the opportunity to lower their monthly costs. Michele Raneri, vice president of U.S. research and consulting at TransUnion, noted that even a drop to 5.5% in mortgage interest rates could result in significant savings for homeowners, potentially reducing their average monthly payment by $284.

Looking ahead to 2024, experts have varying predictions for mortgage rates:

Lawrence Yun, chief economist at the National Association of Realtors, anticipates rates heading toward 7% in the coming months, eventually settling in the 6% range by spring 2024.

Crystal Sunbury, a senior analyst at RSM U.S. real estate, believes that assuming no major economic shocks, mortgage rates will continue to ease slowly, reaching a range of 6% to 6.5% by spring 2024.

The Mortgage Bankers Association (MBA) offers a baseline forecast, suggesting that mortgage rates will end in 2024 at 6.1% and gradually drop to 5.5% by the end of 2025 as Treasury rates decline and the spread narrows.

Matt Vernon, head of retail lending at Bank of America, cautions that significant drops in mortgage rates might not happen early in 2024. If they do occur, they will likely be gradual, possibly starting later in the year.

Jack Macdowell, chief investment officer and co-founder of Palisades Group, expects rates to remain in the 7% to 7.25% range throughout the first quarter of 2024.

Fannie Mae’s housing forecast suggests that the 30-year fixed-rate mortgage will average 7% in the first quarter of 2024 and gradually decline over the year, reaching an average of 6.5% in the fourth quarter.

Given this range of predictions, homeowners and prospective buyers have much to consider. Is 2024 a good time to refinance? The answer depends on several factors, with interest rates playing a central role.

Many U.S. mortgages originated in 2020 and 2021, when interest rates were at record lows. During the same period, there were approximately 14 million mortgage refinances. If you were fortunate enough to secure a mortgage during that time, you might find that 2024 is not necessarily the ideal moment to refinance.

With rates still higher than they were a year ago, both purchase and refinance applications have remained stuck near their lowest levels since the early 2000s, as per MBA data.

Refinancing in 2024?

So, as we enter 2024, should you be gearing up for a refinance? 

Matt Vernon of Bank of America advises that the decision hinges on rates and economic conditions. If rates are lower than when you initially obtained your mortgage, it might be an advantageous time to refinance. However, the direction of rates in 2024 will be influenced by broader economic conditions.

“In times of uncertainty, rates typically remain low or may even decrease, whereas a thriving economy might result in higher rates,” notes Vernon.

 Nevertheless, it’s essential to be aware that not all refinancing options lead to lower interest payments over the life of the loan. While you might secure a lower monthly mortgage payment, extending the loan term could result in higher overall interest costs. Refinance rates often tend to be higher than purchase rates.

Despite these considerations, many homeowners benefit from historically low mortgage rates obtained during the pandemic. These rock-bottom rates are unlikely to return anytime soon, if at all, which may limit the incentive for many homeowners to refinance.

As we navigate the coming months and years, one thing remains clear: the real estate market is in a state of flux. While rates may trend downward, the ongoing challenge of housing affordability and the balance between supply and demand will continue to shape the landscape for homeowners and buyers alike.

In the grand tapestry of the real estate market, mortgage rates are just one thread. Like any other, the future of this market will be influenced by a complex interplay of economic forces, policy decisions, and individual choices. While we can analyze and make predictions, only time will reveal the full picture of what lies ahead for mortgage rates and the broader real estate market.

San Diego Real Estate Experts

If you want to discuss the San Diego real estate landscape or are interested in buying or selling a San Diego County property, contact the San Diego Realty Gals.