How Low Could Mortgage Rates Go in 2024? | TheRuethTeam.com

Did we just see the lowest mortgage rates for 2024? I mean, the Federal Reserve cut the Fed rate by 50 bips last week, yet mortgage rates responded by increasing, which confused a lot of people given how big the Fed came out swinging in their first rate cut since March of 2020. So the question is a good one. Did we hit the bottom for rates for 2024? Or will rates turn back down, giving us even lower rates before year end? It's a question on many homebuyer and homeowners' minds. So let's talk about it. I mean, how much lower can they go and what will it take to get them there? But before we do, do something for me, would you? I mean, hit that thumbs up and subscribe to my channel, but even more importantly, comment down below on where you think rates will end this year. You'll be surprised how high some of the experts are still targeting. I'd be remiss if I didn't start out this conversation by taking a moment to appreciate simply how far mortgage rates have already come down. Back in October, 2023, mortgage rates hit a high of 8%. By July, 2024, they dropped to 7%. And now we're looking at rates around 6.2%. I mean, think about that for a minute. That's a significant drop in less than a year. So can rates go even lower? And if so, what exactly needs to happen to get them there? There are two main factors that could drive lower mortgage rates this year. The first one is a softening labor market. When the job market shows signs of slowing down, it often leads to lower mortgage rates. A weaker labor market can signal a slowing economy, which prompts investors to move their money from higher risk investments into safer assets like bonds. The increased demand for bonds pushes bond prices up and yields or rates down, ultimately leading to lower mortgage rates. The second thing that could do it is improved mortgage spreads. I wanna dive a little bit deeper into this concept because not enough people are talking about the mortgage spread, and certainly it's not as common as what's going on in the labor market and inflation, but it does impact our rates. The mortgage spread is the difference between the average 30-year fixed mortgage rate and the yield on the 10-year Treasury note, which is considered a risk-free investment. This spread essentially measures the additional risk investors take on and wanna be paid for by investing in mortgages or mortgage-backed securities instead of risk-free government-backed 10-year Treasuries. Historically, the mortgage spread ranges between 1.65% and 1.85%. I mean, that's the risk premium for holding a mortgage-backed security. But right now, it's bigger. It's been bigger during the turbulence that we saw with the banks closing down, but it's still big. It's 2.445%, which means that investors are demanding a higher return when they invest in mortgage-backed securities to compensate for the perceived risk in the mortgage and financial markets. If this spread continues to drop towards the historical norms, which it's actually been doing for the last 30 days consistently, it will help bring mortgage rates down even further. In fact, 30 days ago, the spread was 20 bps higher than it is today, which has helped us get to the low rates we have today. So think about that. If this drops another 45 bps between now and the end of the year, mortgage rates could be at 5.75. So what needs to happen for that mortgage spread to narrow? One is an increased investor confidence. As the financial markets stabilize, think about banks and commercial real estate, and investors feel more comfortable with the risks associated with mortgage-backed securities, the spread will decrease. The reduction of the Fed rate is slightly helping with this as the cost to borrow and refinance is going down for businesses and institutions and even commercial real estate holders. The second thing is improved economic indicators. Positive signs in the economy, such as controlled inflation and steady growth, can boost investor confidence. Let's double-click on that 10-year Treasury note for a second. I mean, it's considered the benchmark for risk-free investments because it's backed by the full faith and credit of the U.S. government, okay? So you can question how a government in a budget deficit can continue to pay its bills bare, but it does. And essentially, the 10-year Treasury notes are the safest place to park money. Since they're a zero-risk investment, every other bond and investments like corporate bonds, munis, junk bonds, and mortgage-backed securities are measured against this benchmark. So when investors are worried about the economy or global events, they block to the safety of Treasuries, thereby increasing its demand. The increased demand pushes up Treasury prices and forces yields down. Since mortgage rates are heavily influenced by the 10-year Treasury yield, a decrease in that yield will also lead to lower mortgage rates. So let's ask the experts where they think rates are going. You're gonna be a little surprised given where the current rate is today of 6.2%. But maybe they're onto something considering that rates are on an upward trend today. Well, here's what some of their forecasts are saying. Bright MLS expects a 30-year fixed rate to hover below 6.4% in the fourth quarter of 2024. Fannie Mae predicts the average 30-year fixed mortgage rate will continue moving down steadily into next year, averaging 6.2%, which is where we are, for quarter four, and 6% in quarter one 2025. According to Wells Fargo, the 30-year fixed interest rate on mortgage is expected to be 6.15 by the end of 2024. Freddie Mac notes that while mortgage rates may experience gradual decline in the coming quarters, they expect rates to remain elevated through 2024. And the Mortgage Bankers Association, or MBA, anticipates that rates will average 6.5% in quarter four and continue trending downward next year. So I just talked that there's a possible chance that we could hit 5.75% by the end of the year given the mortgage spreads. So to get that, what do we need? Well, we need both further softening of the labor market. The continued signs of economic slowdown would push investors further into bonds, lowering yields and subsequently mortgage rates. We'd also need the normalization of that mortgage spread. If the spread narrows back towards historical ranges of 1.65 to 1.85%, it would indicate that the investors are more confident in the mortgage market and financial market, which would, again, help lower rates. So what does this mean to you? Well, to homebuyers, lower rates improve affordability and increase your purchasing power. If rates drop further, you could qualify for a larger loan or even better, enjoy a lower monthly payment. But do beware of increased competition as rates decline, especially for those perfect homes that are HGTV ready. And for homeowners, especially those considering a refinance, even a drop of a half a percent can lead to savings over the life of the loan. For example, refinancing a $600,000 mortgage from 6.75 to 6.25 could reduce your principal by an additional $3,000 over five years. I get that maybe that doesn't sound very sexy. Change that to a full 1% drop. And the principal reduction jumps to over $7,000 in the first five years and almost $400 a month in savings. But remember, predicting mortgage rates isn't an exact science. There are moving parts, including economic indicators, Federal Reserve actions, and global events. While we've already seen a substantial decrease in mortgage rates, there is still a potential for them to even go lower this year and of course, well into next year. However, it depends on multiple factors aligning in our favor. As always, it's crucial to stay informed and work with a knowledge mortgage professional who can help you navigate these changes and make the best decision for your personal financial situation. So thanks for hanging with me today. If you have any questions or you need a personalized solution or advice, don't hesitate to reach out. That's what I'm here for, to make sense of this ever-changing market. Until next time, take care and stay informed.