Mortgage Rates Are Supposed to Fall. Don’t Bet on It.
Mortgage rates are expected to come down by the end of the year. But with economists revising their forecasts higher, it’s time to consider the possibility that for the third year in a row, rates could rise instead.
With the Federal Reserve expected to begin to cut short-term interest rates later this year, mortgage rates are widely expected to move lower in the coming months. But a shock to economic and monetary expectations, including fewer or postponed rate cuts than anticipated, could send Treasury yields back up. That could drive mortgage rates higher, potentially cutting into home sales and softening home prices.
Already, economists are revising their 30-year mortgage rate calls from earlier this year.
in March revised its call for rates to end the year at 6.4%, up from a previous forecast of 5.9%. “Hotter-than-expected inflation data and strong payroll numbers are likely to apply more upward pressure to mortgage rates this year than we’d previously forecast, as markets continue to evolve their expectations of future monetary policy,” chief economist Doug Duncan said.
The National Association of Realtors’ most recent quarterly forecast, published in January, called for mortgage rates ending the year at 6.1%. That’s likely heading up to 6.4% or 6.5% in the trade group’s next forecast, expected at the end of April, says Lawrence Yun, NAR’s chief economist. “The economy looks to be a little stronger than anticipated, which may delay the rate cut by the central bank,” he says. That will reduce the number of home sales this year, though Yun still expects an increase from last year’s nearly 30-year trough.
The good news for home buyers is that a mid-6% mortgage rate still represents a drop from recent levels near 6.8%. The bad news: There’s reason for skepticism that rates will fall, Wedbush analysts wrote recently. “We do not see a near term catalyst(s) to pull mortgage rates lower,” analysts Jay McCanless and Brian Violino wrote in an April 2 note.
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Part of the explanation is the spread between the 10-year Treasury yield and the 30-year fixed-rate mortgage. The risk that mortgage holders will refinance as soon as rates fall, requiring mortgage-backed securities investors to reinvest at a lower return, has helped keep the spread between the 10-year Treasury yield and the 30-year fixed-rate mortgage unusually wide.
Despite a consensus view that rates will drop, “we are taking the opposite view on that front because we believe mortgage originators (bank and nonbank) are unwilling to bear the prepayment risk without being compensated for that risk,” the analysts wrote. Lenders are also wary of the inflation risk posed by the home price rebound that began last summer, they added.
With the spread set to remain high, a shock to economic expectations could push Treasury yields higher. Take the March jobs report, for example. The reading was solid—strong payroll gains, low unemployment, and wages grew more quickly than inflation. In response, the 10-year Treasury yield, a mortgage rate benchmark, climbed, closing at the highest level since late November. Economists say the report won’t change what the Fed will do, Barron’s reported—but the data adds to the importance of upcoming reports like the Consumer Price Index, which could similarly send yields up.
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That’s not a new phenomenon: Shifts in the Fed’s stance on inflation and relatively robust signs of economic activity came as a surprise to traders in the later half of both 2022 and 2023, sending Treasury yields—and, by extension, mortgage rates—climbing.
Mortgage rates hit 7% for the first time in two decades in late 2022, and climbed to 7.79%, a new 23-year high, in late 2023. Housing demand suffered as a result, leading to slightly lower home prices in early 2023 and a drop in existing-home sales to the lowest level in nearly 30 years.
The second half of 2024 could face similar challenges, the Wedbush analysts wrote, “because mortgage rates remain near the highs of the cycle, the supplies of new and existing homes are rising, input costs are inflating, and average closing prices have trended lower over the last 8 quarters.”
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If mortgage rates do rise, the increase could snuff out the nascent housing rebound. As in recent years, buyers and sellers could balk, with house hunters retreating to the sidelines and homeowners opting to wait until rates come down to list.
In that case, prices could move higher as home supply dries up. Such a scenario could push buyers still in the market towards home builders, an outcome last year that helped new home sales—and the shares of the companies that build them.
But this time around could be different if existing-home supply keeps rising. Home listings have been gaining to start the year, with active listings measured by Realtor.com last month at the highest March level since 2020, the listings website said. (
which owns Barron’s, also owns Move, which operates Realtor.com.)
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A cost-driven shock to demand, combined with the growing need for homeowners to move, are among the factors that could send home prices down, Barron’s reported late last year.
Some homeowners are already cutting prices. Last month, 15% of listings measured by Realtor.com saw a price reduction, the largest March share of reductions since 2019. A raft of factors, including a greater supply of previously owned homes, newly built houses, and more rentals, will likely keep prices flat to slightly lower this year, Realtor.com chief economist Danielle Hale previously told Barron’s.
Write to Shaina Mishkin at shaina.mishkin@dowjones.com
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