Well, were about halfway through the year and mortgage rates seem to have settled in around the high 6% range.
While averages vary based on the source, Freddie Mac last posted a rate of 6.67% for the popular 30-year fixed.
This rate began the year 2023 around 6.50% and has yo-yoed a bit since, falling as low as 6.09% and climbing as high as 6.79%.
So it appears mortgage rates have become somewhat range-bound, hovering around double what they were in early 2022 (3.25%).
The question is when will they drop again? Or could they even rise higher from here?
New Forecasts Put Mortgage Rates Back in the 5s by 2024
First the good news. Several economic forecasts predict that 30-year fixed mortgage rates will return to the 5s.
The bad news is this might not happen until the second half of 2024. In other words, another full year of rates in the high 6s could be in store.
Fannie Mae’s June 2023 Housing Forecast expects the 30-year fixed to peak at 6.6% in the third quarter of 2023, then fall to 6.3% in Q4.
Thereafter, rates are forecast to trickle down to 6.1% in Q1 2024, 5.9% a quarter later, and eventually 5.6% by year-end.
So that’s something to be excited about if you’re in search of a lower mortgage rate.
Similarly, Goldman Sachs pegs the 30-year fixed at 5.9% in 2024, with a little bit of relief coming in the second half of 2023.
But not a whole lot – we’re talking an average rate of 6.6% in Q3 and 6.4% in Q4, compared to 6.7% in the second quarter of this year.
Then there’s the latest forecast from Wells Fargo, which puts the conventional 30-year fixed at 5.81% in 2024.
That’s down from an average of 6.57% in 2023 and represents about a .75% improvement. It would also push the average mortgage rate closer to the 2021 average of 5.38%.
Higher Mortgage Rates for Longer, But Some Relief Is in Sight
It seems most economists are now on the same page regarding mortgage rates.
For a while, there was a real fear we could push 8% and even double-digits, but there appears to be more clarity now.
Perhaps the Fed is close to wrapping up its many rate hikes, which can help guide long term rates like mortgages lower.
If the worst is truly behind us, with respect to inflation, those forecasts might come to fruition.
But as noted, it could take time. And even then, we’re still looking at an average mortgage rate that is about double recent lows.
Per Wells Fargo economists Charlie Dougherty and Patrick Barley, “Until inflation is fully tamped down, however, the Fed is likely to keep a restrictive policy stance and mortgage rates will likely remain elevated.”
They add that the recent widening of mortgage rate spreads “adds another layer of uncertainty to the outlook for mortgage rates.”
Still, after staring at 7% mortgage rates for a year or so, an interest rate in the mid-5% range won’t look so bad, right?
It could even allow recent home buyers to refinance their mortgages to a lower rate. And make home buying a bit more affordable for those yet to dive in.
How to Navigate Mortgage Rates in the Meantime
If there’s an expectation that mortgage rates will gradually improve over the next 12 months, here are a few things to consider.
One, paying points. It doesn’t make sense to pay discount points if you expect to refinance in the near future. The same is true for those who expect to sell in the short term.
Simply put, you pay a lot of money upfront for monthly savings spread out through the loan term.
If you only keep the loan for a year or less, you won’t actually realize those savings. But you’ll still pay for them. And there aren’t any refunds on points.
A better alternative, assuming mortgage rates go down in 2024, is a temporary buydown.
These provide payment relief for the first couple years of the loan before reverting to the full note rate.
In that sense, you can actually get the full benefit if you keep the loan for only 12-24 months.
Then you can refinance to a lower rate at or around the time the interest rate is due to move higher.
Another thing to look at is mortgage type. While adjustable-rate mortgages aren’t widely available at the moment, or heavily discounted, a 5/1 ARM or 7/1 ARM could potentially save you money.
These loan products are fixed for five or seven years, respectively, before the first adjustment. So if you expect lower mortgage rates in 2024, you could use one until rates come back down.
As an example, Wells Fargo is advertising a 7/6 ARM for 6.375% and a 30-year fixed for 6.625%.
Not a huge spread between the two products, but savings nonetheless.
On a $600,000 home loan, we’re talking about $100 in savings per month. Keep it for five years and it’s $6,000.
Ideally, you shop around and find an even bigger discount.
Lastly, it could make sense to take on a slightly higher rate in exchange for no closing costs, if offered.
The same argument applies. If you only expect to keep the mortgage for a short period of time, you won’t want to pay a lot to obtain it.
In short, the mortgage rate doesn’t carry as much weight if it’s going to be short-lived anyway.
So be sure to explore all your options when shopping for home loan. Consider interest rates, closing costs, loan types, temporary buydowns, and more.
And be prepared to refinance in 2024 if mortgage rates do indeed fall by nearly 1% from current levels.
Housing Market Implications with Lower Mortgage Rates
What about home prices? And sales? If mortgage rates do in fact fall back into the 5% range, we could see a lot more demand from sidelined buyers.
We could also see a lot more supply as existing homeowners feel less of the mortgage rate lock-in effect and finally list their properties.
That could mean a more robust housing market if both demand and supply rise in tandem. But if supply continues to remain tight, lower mortgage rates would likely spur increased bidding wars.
The housing market has actually held up pretty well despite a doubling in mortgage rates. So it would be logical to anticipate a hot seller’s market if rates trickled down to the 5s.
Conversely, this would dampen home builders’ moods as they’ve enjoyed virtually zero competition from existing homeowners of late.
It would also stifle the Fed’s plan to reset the housing market and cool off excess demand.
But perhaps there is a comfortable medium somewhere in between in which buyers and sellers (and builders) can transact again, move again, and quite simply afford to purchase homes again.