Mortgage rates have reached their lowest point since May, dropping to 6.62% following the Federal Reserve’s decision to keep interest rates unchanged in December. Experts predict further rate cuts next year, potentially improving housing affordability.
Mortgage Rates Drop to Lowest Point Since May, Sparking Hope for Increased Housing Affordability
Mortgage rates have reached their lowest point since May, dropping to 6.62% following the Federal Reserve’s decision to keep interest rates unchanged in December. This news has sparked hope for increased housing affordability as experts predict further rate cuts next year.
( Credit to: Fortune )
The average rate for the 30-year fixed mortgage, which is the most popular mortgage option in the country, experienced a significant decrease of nearly 20 basis points from the previous rate of 6.82% after the Federal Reserve’s announcement. Although there was a slight increase to 6.64% the following day, this still represents a remarkable two-day movement in rates, one of the largest in recent memory, according to Matthew Graham, Chief Operating Officer of Mortgage News Daily.
The future trajectory of mortgage rates will largely depend on the state of the economy. Graham emphasized that the rate movement will be closely tied to economic data, stating that if the data continues to perform as it has been, there is a possibility of rates dropping even further into the five percent range, and potentially even reaching the high-fours. However, he also noted that a recession next year could push mortgage rates below 5%, further improving affordability. Ultimately, the key factor influencing rates will be the economic data, particularly inflation, reaching the Federal Reserve’s target of 2%.
Factors Influencing Mortgage Rates
Prior to the recent drop, mortgage rates had been declining steadily due to lower-than-expected inflation reports. The latest data showed a year-over-year inflation rate of 3.1% last month, a significant drop from the four-decade high of 9.1% in June of the previous year. The Federal Reserve’s efforts to control inflation through aggressive interest rate hikes had initially caused mortgage rates to rise above 8% in October.
While the decrease in inflation is significant, it still leaves room for price increases to reach the Federal Reserve’s target of 2%. It remains uncertain whether this target will be achieved in the coming year, with predictions varying between the Congressional Budget Office’s estimate of slightly over 2% by the end of 2024 and the Federal Reserve’s prediction of 2-3%. However, if inflation continues to decline at its current rate, mortgage rates are likely to continue their downward trend.
Graham’s prediction of rates falling into the high-fours and potentially even the fives is notably lower than other experts’ forecasts. Redfin’s Chief Economist anticipated rates to fall to around 6.6% next year, while the Mortgage Bankers Association predicted a rate of 6.1% in the fourth quarter of next year. Moody’s Chief Economist, Mark Zandi, expected rates to settle between 5.5% and 6% in the long run. These forecasts are subject to revision and are often incorrect, as demonstrated by this year’s frequent predictions of a recession or housing market crash that have yet to materialize.
Impact on the Housing Market
The anticipation of lower mortgage rates has already had an impact on the housing market. Mortgage applications and refinancing have increased even before the recent rate drops. Home loan refinancing applications saw a 19% increase last week compared to the previous week, and a 27% increase year-over-year, according to the Mortgage Bankers Association. The Federal Reserve’s decision to leave interest rates unchanged is expected to further boost this upward trend in activity.
“There’s definitely a buzz that is increasing in the housing and mortgage market over the past two days,” said Graham. While the increase in activity is starting from historically low levels, it is still a positive sign for the industry.
Conclusion
Overall, the recent decline in mortgage rates, coupled with the Federal Reserve’s optimistic outlook for rate cuts next year, is providing hope for improved housing affordability. However, the future of mortgage rates will depend on economic data and its impact on inflation. If inflation continues to fall, there is a possibility of rates dropping even further, potentially reaching levels not seen in years.
