Why Mortgage Rates Could Continue To Decline

When you read about the housing market, you’ll probably come across some information about inflation or recent decisions made by the Federal Reserve (the Fed). But how do those two things impact you and your homebuying plans? Here's what you need to know.

The Federal Funds Rate Hikes Have Stalled

One of the Fed’s primary goals is to lower inflation. In order to do that, they started raising the Federal Funds Rate to slow down the economy. Even though this doesn’t directly dictate what happens with mortgage rates, it does have an impact.

Recently inflation has started to cool, a signal those increases worked and are bringing inflation back down. As a result, the Fed’s hikes have gotten smaller and less frequent. In fact, there haven’t been any increases since July (see graph below):

And not only has the Fed decided not to raise the Federal Funds Rate the last three times the committee met, they’ve signaled there may actually be rate cuts coming in 2024. According to the New York Times (NYT):

“Federal Reserve officials left interest rates unchanged in their final policy decision of 2023 and forecast that they will cut borrowing costs three times in the coming year, a sign that the central bank is shifting toward the next phase in its fight against rapid inflation.”

This indicates the Fed thinks the economy and inflation are improving. Why does that matter to you and your plans to buy a home? It could end up leading to lower mortgage rates and improved affordability.

Mortgage Rates Are Coming Down

Mortgage rates are influenced by a wide variety of factors, and inflation and the Fed’s actions (or as has been the case recently, inaction) play a big role. Now that the Fed has paused the increases, it looks more likely mortgage rates will continue their downward trend (see graph below):

Although mortgage rates may remain volatile, their recent trend combined with expert forecasts indicate they could continue to go down in 2024. That would improve affordability for buyers and make it easier for sellers to move since they won’t feel as locked-in to their current, low mortgage rate.

Bottom Line

The Fed’s decisions have an indirect impact on mortgage rates. By not raising the Federal Funds Rate, mortgage rates are likely to continue declining. Let’s connect so you have expert advice about changes in the housing market and how they affect you.

If you're concerned about the possibility of home prices dropping, rest assured that many experts project they’ll actually rise at a normal pace in 2024. Whether you're gearing up to buy or sell in the new year, I'm here to chat about the latest forecasts, and help you plan for your next move.

The Mortgage Bankers Association (MBA) and other sources predict that interest rates will likely continue to fall. The MBA forecasts that rates will end 2024 at 6.1%[1]. Lawrence Yun, chief economist at the National Association of Realtors, also expects mortgage rates to fall below 7 percent during the winter months[3]. These predictions are based on factors such as the performance of the U.S. economy, 10-year Treasury yields, and the Federal Reserve's decisions[3][5]. Despite the drop in rates, mortgage demand has been mixed, with a decline in refinance applications but a small increase in purchase applications[2][4]. The decline in rates has been attributed to factors such as cooling inflation and a softening economy[5].

Citations:

[1] https://www.marketwatch.com/guides/mortgages/mortgage-rates-for-tuesday-12-19-2023/

[5] https://www.reuters.com/markets/us/us-mortgage-interest-rates-fall-two-month-low-mba-2023-11-22/