2023-2024 Mortgage Interest Rate Outlook: Will Rates Go Back Down?

Mortgage interest rates have seen significant fluctuations recently. After hitting a record low of 2.7% at the end of 2020, 30-year fixed-rate mortgage loans escalated to 7.08% by November 10, 2022 – the highest since 2002. As of October 12, 2023, the rate stands at 7.57%, marking this year’s peak. The trajectory of these rates in 2023 remains uncertain, influenced by various economic factors.

Anticipating Interest Rates in 2023

The Federal Reserve’s ongoing hikes in the federal funds rate, primarily to combat inflation, heavily influence mortgage rates. Currently, the Consumer Price Index, a key inflation indicator, has decreased to 3.7% from a high of 9.1% in June 2022, yet the Fed’s 2% inflation target remains unmet. Continued efforts to reach this goal suggest a likelihood of further interest rate increases, though global economic and geopolitical instability adds a layer of unpredictability.

Predicted Mortgage Rate Trends for 2023

Recent trends indicate a minor uptick in mortgage rates, aligning with expert predictions. Fannie Mae’s September Housing Forecast projects a rise to 7.1% in Q4 2023. Various factors, including inflation dynamics and Federal Reserve policies, will shape these rates.

Inflation’s Role

In 2022, inflation surged to 40-year highs but has since shown signs of slowing. The Bureau of Labor Statistics identifies housing costs as a primary inflation driver. Amy Shunick of Bennett explains that while inflation doesn’t directly set mortgage rates, its impact on the dollar’s value can lead to rate increases.

Influence of the Federal Funds Rate

The federal funds rate, the benchmark for interbank loans, directly affects consumer borrowing costs, including mortgage rates. In 2022, the Fed raised this rate seven times, cumulatively increasing it by 425 basis points. These hikes, aimed at curbing inflation, can initially raise mortgage rates but potentially lead to lower rates long-term by controlling inflation.

Will 2023 See a Decline in Mortgage Rates?

There’s a possibility of a marginal decrease in mortgage rates by the end of 2023. However, significant reductions may not materialize until 2024, contingent on the Federal Reserve’s future decisions. Economic experts, including Mark Fleming of First American Financial Corp., suggest that rate drops hinge on the Fed’s success in lowering inflation closer to its 2% goal.

Projections for Mortgage Rates in 2024

Experts predict a drop in mortgage rates in 2024, though estimates vary. Fannie Mae foresees a decline to 6.3%, while the Mortgage Bankers Association is more optimistic, expecting rates to fall below 5%.

Long-Term Mortgage Rate Forecast

Predicting mortgage rates over a five-year span is challenging due to the ever-changing economic variables. Nonetheless, the Mortgage Bankers Association projects a further decrease to 4.6% by 2025.

Best Practices for Mortgage Rate Lock-In

Given the fluctuating nature of mortgage rates, deciding when to lock in a rate can be complex. Lock-in periods typically last up to 90 days, and while locking in shields you from potential rate hikes, it could also mean paying more if rates drop before finalizing a loan. A pragmatic approach is to lock in a rate only after an offer on a home is accepted, considering overall affordability.

Refinancing Considerations

Refinancing decisions depend on individual circumstances. It’s advisable when it leads to lower interest rates, shorter loan terms, or stabilizes an adjustable-rate loan. However, refinancing can be counterproductive if it extends the loan duration significantly or diverts funds from other financial priorities. Be mindful of lender fees and closing costs, which can offset refinancing benefits.

Impact of Mortgage Rates on Home Prices

Mortgage rates and home prices are interlinked through demand dynamics. Lower rates boost home buying demand, raising prices, while higher rates dampen demand, potentially lowering prices. Moving forward, both rates and housing inventory will continue to influence home prices.

Concluding Advice

In an uncertain economic landscape, trying to time the market, whether for home buying or refinancing, is rarely beneficial. Instead, focus on what’s financially feasible and make decisions based on a comprehensive understanding of costs versus benefits. This approach reduces the stress and uncertainty inherent in the home buying or refinancing process.