Last Updated on February 5, 2024 by Luke Feldbrugge
Home buyers are asking, “Are interest rates going up or down,” quite often these days. Mortgage rates have come down since last year’s highs, and are expected to continue the trending down throughout the year. As inflation cools from last year, the Fed is even considering implementing rate cuts throughout 2024. Currently in the mid-6% range, mortgage interest rates continue to remain fairly low if we look back historically. The real question for those looking to enter the housing market and purchase a new home is, will interest rates continue to come down in 2024 and make a home purchase more affordable?
Are Interest Rates Going Up or Down?
In 2023 inflation surged to a new high and then decreased again, creating a tumultuous time in the housing market, and for mortgage interest rates.
In December, inflation increased slightly to 3.4%. With inflation rising in December, many potential home buyers began asking, are interest rates going up again to combat it?
While interest rates are up slightly, when looking at January 2024 vs. December 2023, they are much lower than last year’s highs, leading many to anticipate continued decreases in interest rates.
Interest rates peaked at nearly 8% in October 2023, but have since fallen consistently, reaching the mid-6% range in January, according to Freddie Mac. As of updating this post, the average 30-year fixed-rate mortgage rate hovers just above the 6.5% mark, while the average 15-year mortgage rate remains in the upper 5% range.
While this may seem high compared to the 3% interest rates experienced from 2019-2022, it is significantly lower than historical averages. In fact, the highest rate ever recorded for mortgage interest rates was 16.81% in 1981, according to Freddie Mac.
Today’s housing market could actually be a welcome relief for many homebuyers.
“Mortgage rates have fallen more than a percentage point from their recent peak, encouraging some buyers to re-enter the market.”
Realtor.com said in a recent economic update.
“As a result, existing home sales picked up slightly month-over-month in November after five months of decline, and pending home sales stabilized.”
Homebuyers who want to buy now may find a more welcoming market than last year’s homebuyers.
Where are Mortgage Rates Going in 2024?
Mortgage rates are currently trending down, and are expected to continue falling for the remainder of 2024. So for now, it looks like those wondering, are interest rates going up or down, can feel pretty good about mortgage interest rates slowly trending down throughout the year.
Over the last few weeks, mortgage rates have hovered near the 6.5% mark, most recently hitting the lowest level since May.
Fannie Mae recently forecasted the average interest rate for a 30-year fixed-rate mortgage (FRM) is expected to dip below 6% this year, boosting housing activity.
“Lower rates are also likely to help ‘thaw’ the existing home sales market currently affected by the so-called ‘lock-in effect.”
Fannie Mae stated in its recent forecast.
“In fact, the ESR Group expects the annualized pace of existing home sales to move up to 4.5 million units by the fourth quarter of 2024, compared to 3.8 million in Q4 2023.”
And although mortgage rates are dropping, the housing market should remain relatively calm when it comes to home price growth.
“The ESR Group expects that the slowly normalizing existing homes market, as well as additional housing supply from the construction of new homes, will help keep further home price growth in check in 2024: Home prices are now expected to rise 3.2 percent over the year, compared to 7.1 percent in 2023,” Fannie Mae stated.
Why are Interest Rates Coming Down?
We are seeing lower interest rates versus the same time last year, but why? One of the top determining factors that affects mortgage rates going up or down is actions from the Federal Reserve.
Ten times per year, officials from the Federal Open Markets Committee (FOMC) meet to discuss the current state of the economy including employment, inflation levels, GDP, recession risk and other factors. Using these economic indicators as a guide, the Federal Reserve voting members make changes to the Fed’s monetary policy to help steer the economy in a positive direction.
Some of the tools that the Fed uses in its decision-making include:
If the Fed wants to boost the economy, it implements policies that will help keep interest rates low. If it wants to slow the economy down, its policy changes will be targeted at raising interest rates.
The Federal Funds Rate
The Federal Funds Rate is the rate that U.S. financial institutions such as banks, credit unions and others in the Federal Reserve System charge each other for overnight loans of reserves deposited at the Fed.
When the Fed makes the cost lower for banks to lend money, they then pass these cost savings on to the consumers through their own loans. Lenders offering credit products decrease the cost of the loan, and start pulling mortgage rates down as well as interest rates on other loans such as auto loans, credit cards, personal loans and more.
The Federal Reserve raised rates several times in the past two years, but recently it has elected to hold off on any new interest rate hikes. In December, the Fed elected to hold off on a rate hike. The Fed has put rate hikes on hold since July 2023. This held the Federal Funds rate at its current targeted range of 5.25% to 5.5%.
The Fed is likely to continue its holding pattern in the months to come, and may even drop rates.
Time will tell, but the outlook for 2024 is better than 2023. If interest rates continue to decrease throughout the year as many top market forecasters are predicting, it will likely help energize the housing market, and motivate more home buyers to enter the market.
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