Mortgage rate drops likely this year, economists say

While average mortgage rates increased by a single basis point this week, they should move lower going forward in 2024 as inflation cools and the Federal Reserve reverses course, Freddie Mac said.

The Primary Mortgage Market Survey put the 30-year fixed at 6.62%, compared with 6.61% one week prior and 6.48% one year ago. It is the first increase in 10 weeks.

The 15-year FRM moved down 4 basis points to 5.89%, compared with 5.93% the prior week and 5.73% for the same period in 2023.

"Between late October and mid-December, the 30-year fixed-rate mortgage plummeted more than a percentage point," said Sam Khater, Freddie Mac's chief economist, in a press release. "However, since then rates have moved sideways as the market digests incoming economic data."

Zillow's rate tracker has the 30-year FRM at 6.26% on Thursday morning, up 1 basis point from the prior day but down 3 basis points from the previous week's average.

"The latest economic data is stronger than expected, meaning fewer policy rate cuts than previously thought could be in the cards for 2024," said Orphe Divounguy, senior macroeconomist at Zillow Home Loans in a Wednesday evening statement.

Divounguy pointed to a couple of trends that might not be beneficial to rate movements. The tight labor market is likely to be a boon for housing, but it could also put less downward pressure on bond yields. The U.S. Treasury is expected to borrow $816 billion in the first quarter, likely bringing upward tension on those yields. 

"While the last FOMC meeting sent rates falling at the end of 2023, market participants and the Fed will be looking for more disinflation in the new year," Divounguy said. "Otherwise, Treasury yields could surge back up, pulling mortgage rates up with them."

The benchmark 10-year Treasury, which had gotten back down to 3.79% on Dec. 27, was close to the 4% mark as of noon on Thursday morning.

"Given the expectation of rate cuts this year from the Federal Reserve, as well as receding inflationary pressures, we expect mortgage rates will continue to drift downward as the year unfolds," Freddie Mac's Khater said. "While lower mortgage rates are welcome news, potential homebuyers are still dealing with the dual challenges of low inventory and high home prices that continue to rise."

But signs of change are emerging. December's lower mortgage rates led to a 5% year-over-year increase in net new listings, real estate brokerage HouseCanary said.

"With that said, any market turns are likely to be slow," said HouseCanary CEO Jeremy Sicklick in a press release. "The mortgage rate lock-in effect is going to keep many would-be sellers who secured pre-pandemic mortgage rates of sub 5% little incentive to move, meaning low inventory will be a continuing trend."