Will Mortgage Rates Come Down in 2024? Updated Housing Market Predictions

Policymakers are not ready to cut interest rates yet as the central bank held rates at their two-decade high, Federal Reserve Chairman Jerome Powell said on Wednesday, as concerns about inflation remain top of mind for the Fed.

The Federal Reserve has been engaged in a historic battle against soaring inflation that at one point hit a 40-year high. In response, beginning in March 2022, the central bank raised rates to their current level of 5.25 to 5.5 percent. The elevated rates have pushed up borrowing costs for mortgages to their highest since the turn of the century and made the cost of capital more expensive slowing business investment in the process. Mortgage rates now hover around 8 percent, the highest they have been since the turn of the century.

On Wednesday, Powell said the central bank was still worried about inflation and policymakers were still asking themselves if they have done enough to bring prices down to the 2 percent target. As of September, inflation in September stood at 3.7 percent.

“The committee is not thinking about rate cuts right now at all,” Powell said. “We will keep policy restrictive so we’re confident that inflation is on a sustainable path down to 2 percent.”

The decision to keep rates at their current levels comes at a time of strong economic growth, elevated wages and a labor market that’s still hiring spurring the consumer to spend.

Powell said policymakers were “gratified” that the central bank’s moves have helped lower inflation without doing damage to the labor market. The unemployment rate stood at 3.8 percent in September, almost back to where it was before the pandemic hit in February 2020, according to data from the U.S. Bureau of Labor Statistics. On Wednesday, data showed that employers were still looking to recruit workers as job openings ticked up and companies hired more than 110,000 people in October, despite an environment of high interest rates and elevated prices.

“That’s historically unusual and a very welcome result,” Powell said. “The same is true of growth.”

Powell suggested that the central bank would still need to see “below potential growth” to get inflation down to target. Economic growth has been strong as evidenced by the third quarter where the economy expanded by 4.9 percent in the three months through September.

The central bank earlier suggested that current tight credit conditions are likely to weigh on economic activities but it’s unclear how quickly they will work to slow inflation to target.

“The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks,” policymakers said in a statement.

Powell told reporters that progress on inflation was unlikely to be straightforward.

“The progress is probably going to come in lumps and be bumpy, but we’re making progress,” he said.

But policymakers were constantly asking themselves if their rate moves have done enough to get inflation down.

“We know that if we fail to restore price stability, the risk is that expectations of higher inflation get entrenched in the economy and we know that’s really bad for people. Inflation will be both higher and more volatile. That’s a prescription for misery,” he said. “So we’re really committed to not letting that happen.”

Powell suggested that policymakers may have underestimated the strength of household savings which explained why people were still spending in the economy, fueling strong job creation, pushing up wages, which in turn raises disposable incomes and spurs spending again and drives more hiring.

“The thing is we’ve been achieving progress on inflation in the middle of this,” he said. “The question is how long can that continue.”

Going forward, policymakers will stay laser-focused on that inflation target, Powell suggested. There will be more inflation readings, additional information about the state labor market and data about economic activity ahead of the Fed’s next meeting in December when they will again decide on what to do with rates.

Powell refused to indicate that the Fed was unlikely to raise rates again.

“I would say, though, that the idea that it would be difficult to raise again after stopping for a meeting or two is just not right. I mean the committee will always do what it what it thinks is appropriate at the time,” he told reporters.

What does this mean for the housing market?

Some analysts suggested that it expected the Fed to pause at the current level for some time, shaping the course of the housing industry over the next year.

“The housing and mortgage markets are at a standstill. Mortgage rates near 8 percent, coupled with a lack of inventory, are impairing affordability, even as new home construction picks up speed,” Mike Fratantoni, chief economist at the Mortgage Bankers Association, said in a statement to Newsweek. “If the Fed does indeed move to cut rates next year and signals its intent to do so, mortgage rates should trend downward.”

He added: “Our forecast calls for this to happen, which would support a somewhat stronger spring housing market.”

Mahir Rasheed, a senior economist at insurance firm Swiss Re, said he expected the Fed to retain higher interest rates for longer but they may be done with hikes.

“Today was effectively just more confirmation,” Rasheed told Newsweek. “It’s not surprising that they continue to telegraph more hikes. They’re effectively just doing their job and trying to signal to markets that they need financial conditions to remain tight.”

As for the mortgage industry, Rasheed suggested that mortgage rates could remain high as bond yields remain high. On Wednesday, bonds rallied which could help mortgage rates but the question would be whether that will remain the case going forward.

“I wouldn’t expect bond yields to come down anytime soon, which, de facto, means that mortgage rates are also likely to remain elevated for the foreseeable future,” he said.

The market reaction seemed to suggest that they don’t anticipate further rate hikes and bond yields fell on that possible expectation, which could be good news for the mortgage sector, at least in the short term, said Yelena Maleyev, senior economist at KPMG.

“That is a bittersweet reaction because that will help the mortgage market because the 30-year fixed mortgage follows the long-term bond yields much closer than it does the Fed’s funds rate,” she told Newsweek. “But that could also be a set-up for more rate hikes in the future if bond yields fall so much, that the mortgage rates fall so much, that housing inflation gets re-invigorated.”

That dynamic makes it a challenging time for policymakers.

“They still have to thread that needle of making sure that, even though they are probably done on rate hikes, their communication remains very hawkish and that this restrictive stance remains in their language for longer into next year so that it’s enough to bring overall inflation down, which includes housing inflation,” Maleyev said.