By Naveen Athrappully
U.S. mortgage rates dipped for the ninth consecutive week amid expectations of interest rate cuts by the Federal Reserve after elevated rates negatively impacted home affordability in 2023.
The 30-year fixed-rate mortgage rate averaged 6.61 percent for the week ending Dec. 28, according to data from Freddie Mac. This was the ninth consecutive weekly drop in mortgage rate since it peaked at 7.79 percent in late October.
“The rapid descent of mortgage rates over the last two months stabilized a bit this week, but rates continue to trend down,” said Sam Khater, Freddie Mac’s chief economist.
Story continues below advertisement
“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.”
The elevated mortgage rate over the past year has had a dampening impact on the U.S. housing market.
According to a report by real estate brokerage Redfin, 2023 was one of the least affordable home-buying years on record.
“Just 15.5 percent of homes for sale in 2023 were affordable for the typical U.S. household—the lowest share on record,” Redfin said in a Dec. 21 press release. “That’s down from 20.7 percent in 2022 and more than 40 percent before the pandemic homebuying boom.”
“The number of affordable homes for sale also dropped to the lowest level on record. There were 352,500 affordable listings in 2023, down 40.9 percent from 596,135 in 2022 and down from over a million per year during the prior decade.”
One of the reasons for the drop in listings is the “elevated mortgage rates,” the brokerage said.
An individual making the median U.S. income of $78,642 would have to spend 41.4 percent of their monthly earnings on housing costs if they bought a median-priced home worth $408,806 in 2023. This is up from 38.7 percent in 2022 and is the highest share on record.
In a Nov. 9 outlook report, Goldman Sachs predicted mortgage rates to stay above 7 percent in 2024 and U.S. home prices to climb by 1.9 percent.
Inventory for existing homes for sale is “historically low” while new listings are being added at the “slowest pace on record,” it said.
“Homeowners looking to sell their houses and buy new ones face the daunting prospect of having to prepay their current mortgages and take out fresh mortgages at today’s higher rates.
This ‘lock-in’ effect is projected to depress sales of existing homes to 3.8 million in 2024, the lowest level since the early 1990s,” Goldman Sachs stated.
Even though the inventory of new homes is continuing to rise, most of this inventory is “still under construction.”
The Goldman Sachs Housing Affordability Index hit a “record low” this year. The situation is expected to “improve only gradually over the next three years.”
High Mortgage Rates
Despite the more than 1 percentage point drop over nine weeks, the current mortgage rate of 6.61 percent is far higher than in 2021. On Dec. 29, 2021, the rate was just 3.11 percent, less than half of what it is now. Compared to a year back, the current rate is slightly higher.
The jump in mortgage rates has mirrored the surge in the Federal Reserve’s interest rate or the federal funds rate. In late December 2021, the federal funds rate was around 0.7 percent. In a bid to contain inflation, the Federal Reserve began raising rates. As a result, the federal funds rate is currently 5.33 percent.
The recent decline in mortgage rates was triggered as a result of investors anticipating that the Federal Reserve would cut their interest rates beginning next year.
While mortgage rates are expected to ease down in 2024, mostly due to the Fed’s rate cuts, not many experts see it dipping to the 3 percent levels. In fact, most industry lenders are expecting mortgage rates to be somewhere in the 6 to 7 percent range.
In its 2024 outlook, the Mortgage Bankers Association (MBA) predicted mortgage rates to be “closer to 6 percent by the end of 2024.”
Speaking to CBS, Aaron Gordon, a senior mortgage loan officer at Guild Mortgage, said that rates will remain higher in the first half of next year and will come down in the latter half.
“In the first half of 2024, inflation will remain somewhat stubborn, the jobs reports will continue to send mixed messages, and the Fed will try and temper down over-exuberant investors and consumers who believe Fed rate hikes are over and Fed rate cuts are imminent,” Mr. Gordon said. “Rates will stay in the 6.625 percent to 7.25 percent range.”
During the second half, inflation will get curbed, the economy will cool down, and unemployment will continue rising, he predicted.
“The Fed will no longer be able to send mixed messages and will have to admit their plan worked. They’ll start to lower their rates early this summer to try and maintain balance and avoid a recession. I predict mortgage rates will then go down to the low to mid-sixes.”
