What will rates do next?

Many people have asked me recently, “What will rates do next?” Sometimes it comes in the question of, “When will rates go down?”

Predicting what rates will do is not my strong suit. What I do know is this:

Buyers waiting for rates to go down, are losing every dollar they gain in a lower rate, and then some, to rising home prices.

The Mortgage Bankers Association (MBA) has unveiled its predictions for the housing market in 2024, anticipating significant growth in mortgage origination volume and other key indicators. According to the MBA’s latest report, they foresee a robust year ahead, but caution of potential economic challenges.

MBA’s projections indicate that the total origination volume for 2024 is expected to reach a substantial $1.47 trillion, an 11% increase from 2023.  

By loan count, the report indicates that the overall mortgage origination volume is also poised for growth, projecting a 19% increase from 4.4 million loans in 2023 to 5.2 million loans in 2024.

Despite the resilience of the U.S. economy throughout 2023, the MBA’s outlook includes a cautious note. They anticipate a mild recession in the first half of 2024, driven by a combination of factors including higher interest rates, tighter credit conditions, and a gradual depletion of household savings accrued during the pandemic era.

The report highlights the impact of fiscal and monetary policies on mortgage rates in 2023. While the Federal Reserve’s hiking cycle may be nearing its conclusion, the timing of rate cuts is uncertain. Lower rates are expected to stimulate homebuyer demand and bolster the inventory of existing homes, thereby supporting the purchase origination volume in 2024.

As we transition into 2024, the job market is anticipated to slow, leading to fewer job additions and an increase in the unemployment rate from the current 3.8% to 5.0% by year-end 2024. Meanwhile, inflation is expected to gradually decline, aligning with the Federal Reserve’s 2 percent target by mid-2025.

Amidst economic slowdown and falling inflation, long-term rates are expected to decrease, which should result in lower mortgage rates. However, a persistent spread of approximately 120 basis points between mortgage and Treasury rates, due to various factors, remains a key consideration. MBA’s baseline forecast suggests that mortgage rates will end 2024 at 6.1% and reach 5.5% by the end of 2025.

Despite economic shifts, the MBA remains optimistic about national home prices. They expect growth over the next three years, buoyed by limited inventory driving price appreciation. First-time homebuyers are poised to play a significant role in housing demand, although they will face challenges including high median purchase and interest payments, limited for-sale inventory, especially for entry-level homes, and restricted credit availability.

The report also notes that new home sales continue to outpace existing-home sales, as buyers increasingly turn to newly constructed homes due to limited existing home listings and intense competition in the bidding process. Data from the Builder Applications Survey indicates consistent year-over-year gains in purchase applications in recent months.

The MBA’s forecast paints a positive picture for the housing market in 2024, despite potential economic headwinds. Mortgage origination volume, purchase originations, and home prices are all expected to experience growth, while the job market and inflation are anticipated to undergo adjustments in the coming year.

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