2024 Mortgage Forecast: When Will Rates Go Down?

Mortgage Rates Forecast for March 2024

Mortgage rates are expected to decline when Federal Reserve policymakers cut 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.

At the start of 2023, economists predicted that mortgage rates would gradually decline throughout the year, but that forecast didn’t come true. In fact, rates trended higher, 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. But in February 2024, rates started rising amid unexpected economic strength, hovering around the 7% mark once again.

“Strong incoming economic and inflation data has caused the market to re-evaluate the path of monetary policy, leading to higher mortgage rates,” Sam Khater, Freddie Mac’s chief economist, says in a Feb. 22 statement.

The February Housing Forecast from Fannie Mae puts the average 30-year fixed rate at 6.5% during the first quarter of 2024, falling to 5.9% by year-end. This reflects a major downward revision in Fannie’s analysis: Just a few months ago, the mortgage giant didn’t expect rates to dip below 7% until the second quarter of 2025. All told, Fannie Mae predicts mortgage rates will average 6.2% in 2024 and 5.7% in 2025.

“Right now, our base case scenario foresees economic growth decelerating, rates gradually declining, and new single-family home sales slowly recovering as construction adds supply,” Doug Duncan, Fannie Mae’s senior vice president and chief economist, says in a Feb. 23 statement. “However, if economic growth continues to surprise to the upside, then we believe the risk of mortgage rates remaining higher for longer will also increase.”

In its latest U.S. Economic Outlook, the Economics Group of Wells Fargo Bank puts the 30-year conventional mortgage rate at 6.8% in the first quarter of 2024, declining to 6.05% by the end of the year. Wells Fargo economists predict that the average rate will dip below 6% at the beginning of 2025.

“We ultimately expect inflation to continue its downward trajectory in the coming months and have not yet made changes to our expectations for Fed policy,” Wells Fargo researchers say in a Feb. 8 forecast update. “We still anticipate the first rate cut to come in May; though if we are off by a meeting, risks are skewed toward June rather than March, in our view.”

In its February Mortgage Finance Forecast, the Mortgage Bankers Association predicts that mortgage rates will fall from 6.9% in the first quarter of 2024 to 6.1% by the fourth quarter. The industry group expects rates will fall below the 6% threshold in the first quarter of 2025.

“The job market in January was stronger than expected along every dimension,” MBA economists say in a February 2024 outlook. “The strong job market is good news for the spring buying season as higher household incomes are a necessary component, but it also means that mortgage rates are not likely to drop much further at this point.”

The National Association of Realtors expects mortgage rates will average 6.8% in the first quarter of 2024, dropping to 6.6% in the second quarter, according to its latest Quarterly U.S. Economic Forecast. The trade association predicts that rates will continue to fall to 6.1% by the end of the year.

“The Federal Reserve will not cut the interest rate in the first half of this year, in my view. But rate cuts of 3, 4, or even 5 rounds will be possible in the second half of the year as rent (inflation) measures will be much more well-behaved,” Lawrence Yun, NAR’s chief economist, says in a Feb. 13 statement. “Mortgage rates will be bouncy week-to-week but will most likely settle towards 6% by the year-end.”

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.”

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.

But the tide turned in November, with economic data on inflation and the labor market pointing to a cooling economy. During the Fed’s January 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 Powell said at a Dec. 13 news conference that another rate hike is “not likely.”

In fact, the Fed released its updated projections materials, which show that three rate cuts are 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, as recent data showed in January, policymakers may adjust their path accordingly.

“While we believe that our policy rate is likely at or near its peak for this tightening cycle, the economy has surprised forecasters in many ways since the pandemic, and ongoing progress toward our 2% inflation objective is not assured,” Powell says. “We are prepared to tighten policy further if appropriate.”

But given the Fed’s projections and recent commentary, multiple rate cuts in 2024 seem more likely than not. Investors are expecting that rate cuts will begin in June, according to CME Group’s FedWatch Tool.

Another reason why 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 under 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.”

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. A June 2023 Redfin study found that 92% of homeowners with a mortgage have a rate below 6%, and nearly a quarter (24%) have a rate below 3%.

“Some (homeowners) simply don’t want to take on a 6%-plus mortgage rate, and some can’t afford to,” Taylor Marr, Redfin’s deputy chief economist, says in the report.

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 recent 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 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 2023. The vast majority (84%) of Americans who bought a home in the past year plan on refinancing to a lower rate in the future, according to a September U.S. News survey. Most of them plan on waiting until rates drop below 6%, which could feasibly happen by the end of 2024; 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.