Falling Mortgage Rates Impact

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Falling Mortgage Rates Impact:  A Brighter Future for Housing in 2024

The housing market has endured its fair share of ups and downs over the past few years. Skyrocketing mortgage rates coupled with soaring home prices have priced many hopeful buyers out of the market entirely. But recent developments suggest the tides may soon be turning in favor of homebuyers.



Falling Mortgage Rates Impact:  Signs of Rate Relief Ahead

After hitting highs above 7% this fall, mortgage rates have reversed course. According to data released Thursday by Freddie Mac, the average 30-year fixed mortgage rate dipped to 6.61% this week – down from 6.67% the week prior. This marks the ninth consecutive week rates have declined.

In fact, rates now sit solidly below the 7% threshold for the first time since August. The descent has been remarkably fast and furious – rates are down nearly a full percentage point in just two short months.

What’s behind this rapid rate retreat? Experts say cooling inflation paired with signs of an economic slowdown have caused investors to temper their expectations about how high the Federal Reserve will need to push rates next year. And lowered rate hike expectations have in turn taken immense pressure off mortgage rates.

Falling Mortgage Rates Impact:  The Fed’s Forecast Offers Hope

While the central bank did push through one final mega rate hike earlier this month, their latest economic projections point to a pause – and potential cuts – on the horizon. Specifically, they forecasted the fed funds rate dropping back to 5.1% by the end of 2023 from its current perch of 4.25-4.5%.

For context, every 0.75 percentage point hike in the fed funds rate this year has translated to roughly 1 percentage point of upside in mortgage rates. So if their economic predictions hold true, mortgage rates could have substantial room to decrease further next year as the Fed reverses course.

Falling Mortgage Rates Impact:  An Improving Affordability Outlook

The rapid rate relief has not gone unnoticed in the housing market. As Redfin chief economist Daryl Fairweather noted: “Many of the factors that made 2023 the least affordable year for homebuying on record are easing. Mortgage rates are under 7% for the first time in months, home price growth is slowing as lower rates prompt more people to list their homes, and overall inflation continues to cool.”

And this is just the start. If mortgage rates continue drifting lower as expected next year, the affordability calculation will only get better for buyers. Consider this – mortgage payments on a median-priced home are nearly $300/month cheaper at 6.5% versus 7%. And analysts are projecting rates could fall to 6% or even slightly below as 2023 unfolds.

Pair lower rates with slowing home price appreciation – potentially even slight declines in some markets – and many more buyers may actually be able to land that home they’ve been dreaming of. After years of ultra-competitive bidding wars, buyers may finally regain some negotiating leverage as well.

The bottom line is this – if you’ve been waiting for the right moment to jump into homeownership, your patience may well be rewarded in the year ahead.

Falling Mortgage Rates Impact:  A Real Estate Rebound on the Horizon

While housing demand has slowed to a crawl in recent months, there are early signs activity may be stirring back to life. Seasonal tailwinds are likely playing a role as buyers rush to finish deals before the holidays. But it would be premature to call it only a seasonal blip.

Mortgage applications for home purchases are up 10% month-over-month. Homebuilder confidence has rebounded sharply from lows this fall as traffic picks back up. And perhaps most tellingly – the supply of homes listed for sale has shown notable growth after months of languishing near record lows. Inventory was up 5.7% year-over-year in November per realtor.com – the largest jump for any month this year.

As Freddie Mac chief economist Sam Khater summed it up: “The rapid descent of mortgage rates over the last two months stabilized a bit this week, but rates continue to trend down. Heading into the new year, the economy remains on firm ground with solid growth, a tight labor market, decelerating inflation, and a nascent rebound in the housing market.”

In other words – the foundation looks to be in place for housing to bounce back in a big way as 2024 unfolds.

Falling Mortgage Rates Impact:  How Low Can Mortgage Rates Go?

Mortgage rates still sit well above last year’s numbers. But with the Fed projected to cut rates next year, analysts say current rates have ample room to decrease further in 2024.

In fact, many experts predict 30-year fixed rates could fall to 6% or even slightly below next year. And if inflation readings continue trending favorably, there’s an outside chance rates could dip as low as 5.5%.

To put this in perspective – a 5.5% rate translates to a savings of over $225/month on mortgage payments versus this fall’s peak. That’s thousands of dollars back in a buyer’s pockets over the course of a year. And substantially increased buying power.

The last time rates were in the 5% range was during the second half of 2023. So we may well be headed right back to the best mortgage affordability environment we’ve seen in quite some time.

Falling Mortgage Rates Impact:  What Would Lower Rates Mean for the Housing Market?

Clearly lower rates translate to major monthly savings for buyers. But easy money also has a way of drawing investors and second home purchasers back into the fray. And historically low rates have preceded some sharp run-ups in housing demand.

So if rates fall to the lowest levels in over a year – what could it mean for real estate across the country? Here are 3 likely implications:

1. Falling Mortgage Rates Impact:  Existing Home Sales Rebound

After declining for 9 straight months this year, existing home sales could be poised for a major comeback. Lower rates make financing significantly cheaper. And slowing appreciation paired with higher inventories reduces competition. 2024 could deliver a welcome return to balance between buyers and sellers.

Expect home shopping traffic, bidding wars, and buying power to ramp back up – potentially rapidly if rates descend to 5.5%. But more manageable gains in home values should limit intense overbidding. For buyers who can pull together a down payment, 2024 could prove to be the best time to buy in quite awhile.

2.  Falling Mortgage Rates Impact:  New Construction Accelerates

A return to lower rates should cause builders to pick up the pace on breaking ground on new homes and developments. They scaled way back this year in the face of eroding buyer affordability. But easy financing has a way of drawing investor dollars off the sidelines. And low existing home inventory suggests substantial untapped demand among first time buyers.

Specifically, look for developers to ramp up projects in lower price point ranges best suited to entry level purchasers. Many put expansion plans here on hold as sky high construction costs and mortgage rates collided with record rents to price out would-be buyers. But improved affordability may prompt builders to make up for lost time.

3.  Falling Mortgage Rates Impact:  Home Price Growth Moderates

While lower rates motivate buyers, slowing appreciation is part of what’s attracting them back to the market in the first place. Home values ballooned over 40% nationally the past three years per CoreLogic data. But price growth has already dialed back to single digits in recent months per Case-Shiller.

If mortgage rates fall to the 5% range in 2024, demand would likely accelerate rapidly from today’s environment. Under more normal appreciation conditions, these dynamics would likely spark major bidding wars and upward pressure on prices.

But home values have already seen major run-ups while wages lagged far behind. And economic uncertainty looms in 2024. So buyer psychology may remain somewhat cautious.

Expect price growth to continue moderating toward the historic norm of 3-5% next year. Reduced competition for homes will prevent values from taking off again. And increased inventory options temper bidding desperation. For buyers worn out after years of ultra-competitive sellers’ markets, this “new normal” will come as a welcome change.

Falling Mortgage Rates Impact:  The Outlook for Interest Rates and Housing in 2024

As 2023 draws to a close, signs point to the housing market being ripe for a major comeback starting in 2024 thanks in large part to falling mortgage rates. Homebuyers are starting to come back off the sidelines thanks to increased affordability and more reasonable home prices. And builders are likely eager to ramp up projects to accommodate renewed demand.

Meanwhile, most experts agree rates should have substantial room to decrease further next year as the Fed changes course – perhaps as low as 6% or even 5.5% for a 30-year loan. Pair low rates with slowing price gains and the door looks open to create the best home buying environment since the hot pandemic summer of 2023.

Of course if the economy stumbles into a full blown recession, all bets are off. But assuming Fed policy goes according to plan, 2024 could go down as a standout year for buyers. Here’s to a strong housing rebound!

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About the Author
Rob Johnson
Realtor, St. Petersburg FL