As the Federal Reserve continues its fight against inflation, the outlook on where mortgage rates will end up in the new year is looking far less grim.
Economists predict rates could land anywhere from 5.7% to 6.8% depending on how quickly inflation cools and whether the Federal Reserve manages to put an end to one of its most intense rate hike campaigns in decades.
While the modest improvement in rates may give some folks on the sidelines relief, affordability challenges will continue to burden most buyers in the market.
"We expect the mortgage rates to turn the corner. In fact, they have been dropping pretty swiftly in recent weeks, [and] we expect that decline to continue as we move into 2024," Danielle Hale, chief economist at Realtor.com, said during the National Association of Realtors (NAR) 2024 Forecast Summit.
"We’re not going to see a big turnaround," Hale noted regarding affordability, "but I do think we’re going to see a baby step in the right direction."
Read more: Mortgage rates at 20-year high: Is 2023 a good time to buy a house?
‘Mortgage rates will remain above pandemic-era lows’
An unrelenting fight against inflation, a string of sudden prominent bank failures in the spring, and spiking fears of a recession all snaked through the economy – and didn’t spare the housing market.
In an effort to bring down inflation to 2%, the Federal Reserve has raised its short-term benchmark interest rate 11 times since March 2022, putting upward pressure on mortgage rates. The current rate of 5.25% to 5.50% is its highest in 22 years.
The effects rippled across the housing market, said Lawrence Yun, chief economist of the National Association of Realtors. Market investors moved in anticipation of most Fed hikes, which caused mortgage rates to jump nearly to 8% as recently as a month ago.
Though the central bank hasn’t reached its inflation target, recent progress has some experts predicting that the Fed may soon be done with its aggressive rate hike campaign. As of Dec. 13, the Fed has paused rates over three consecutive meetings.
Fed Chair Jerome Powell said during a conference call Wednesday that an appropriate level of the federal funds rate would be 4.6% at the end of 2024. The central bank also indicated it expects three rate cuts next year.
"The bond market has already pivoted to say that the Federal Reserve will be cutting interest rates next year and consequently, the 30-year interest rates are now approaching 7% compared to 8% just one month ago," said Yun, who believes mortgage rates will settle in the mid-6% range next year.
According to Yun, three factors could influence any Fed decision to cut rates. First, it’s the job market — which has been softening each passing month.
"Jobs are being added, but you can see it’s becoming lighter and lighter, and the Federal Reserve certainly does not want to see that number turn negative," Yun said.
Second, the Fed may extend help to community banks, which have been suffering from high rates as their special credit line ends in March. Lastly, Yun expects that a slowdown in market rents should be a key driver of improvements in inflation.
All eyes will be on Fed policymakers as they continue working to cool down inflation next year, Hale noted. While mortgage rates have improved some since the Fed’s last FOMC meeting – coming down to 7%, they still remained at their highest level in over 20 years.
"We expect the decline to move into 2024 and see mortgage rates at about 6.5% at the end of 2024 – and to average about 6.8% for the calendar year," Hale said.
At Fannie Mae, an expert survey panel predicted that rates would eventually settle around 5.7% next year.
Still, some economists anticipate that rates could increase early in 2024 – before leveling off. The Mortgage Bankers Association (MBA) expects rates to be around 7% starting next year, gradually declining to 6.1% by the year-end and sinking to as low as 5.5% in 2025.
A separate housing forecast by Redfin also predicts rates to hover around 7% in the first quarter before slowly dropping to 6.6% by the end of 2024, with the Fed cutting its key rate two or three times starting this summer.
"Mortgage rates are likely to remain well above pandemic-era record lows because financial markets increasingly believe the country will avoid a recession in 2024," Redfin analysts wrote.
‘You can’t get worse than this year’
As mortgage rates are expected to moderate going into 2024, experts say that may support some recovery in purchasing activity.
The Mortgage Bankers Association expects origination volume to total $2 trillion in 2024 and $2.3 trillion in 2025 – an increase driven by purchase applications. Refinance activity will remain lower, as it will take significantly lower rates to bolster activity back into that market.
Lower mortgage rates also kept most homeowners handcuffed to their properties this year – keeping inventory of existing homes tight and home prices elevated.
"Many would-be sellers note the sharp difference between current rates and the all-time lows under 3% reached just three years ago," Hale said in an emailed statement.
With home prices up more than 20% since President Biden took office, that could also reflect badly on his re-election bid, Redfin’s forecast found. A recent poll revealed that 65% of voters disapprove of Biden’s handling of the economy, with lack of affordability listed as a major factor.
That may convince Biden and his opponents to make "splashy housing policy proposals" to try to improve voter sentiment, Redfin predicted. While Democrats may focus on subsidizing down payments for first-time homebuyers, Republicans may target reducing regulations that limit development.
"I feel like you can't get worse than this year," Danushka Nanayakkara, assistant vice president of forecasting and analysis at the National Association of Home Builders, said.
Gabriella is a personal finance and housing reporter at Yahoo Finance. Follow her on Twitter @__gabriellacruz.