3 mortgage rate scenarios that could occur in 2024

When the Federal Reserve cut interest rates to near zero in the early stages of the pandemic, mortgage interest rates also plummeted to below 3% for conventional 30-year fixed-rate mortgages. However, mortgage rates then soared in 2022 and continued climbing for much of 2023 due largely to factors like inflation and the Fed's corresponding rate hikes.

Recently, however, the Fed has kept rates steady and mortgage rates have started to drop. The week ending October 26, 2023, 30-year fixed-rate mortgages averaged 7.79%. Just a few weeks later, for the week ending December 7, 2023, the average fell all the way to 7.03%, according to Freddie Mac.

But will this recent downtrend continue in 2024? Or will rates stay flat or even go back up?

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3 mortgage rate scenarios that could occur in 2024

While no one really knows the future, many experts agree on the general direction, where interest rates will fall somewhat in 2024 but not get as low pandemic-era levels. Here, we'll take a closer look at three possible mortgage rate scenarios that could occur in 2024.

Rates could fall to around 6.5% for 30-year fixed-rate mortgages

One possible scenario is that mortgage rates could start the year flat and then fall sometime in the first half of 2024 around 0.5% to reach approximately 6.5% for 30-year fixed rate mortgages.

"I expect mortgage rates to hover around 7% for the first few months of the new year before falling close to 6.5% in mid-2024. The market currently expects inflation to continue to cool and increasing labor market weakness in early 2024, leading the Fed to begin cutting rates at either its March 20th or May 1st meeting," says Peter Idziak, an attorney and senior associate at Polunsky Beitel Green, a law firm for residential mortgage lenders.

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Rates could fall to around 6% for 30-year fixed-rate mortgages

Another possibility is that rates take an even sharper downturn, perhaps to the point of reaching approximately 6% for 30-year conventional fixed-rate mortgages.

"We expect a 75-100 basis points drop in the fed funds rate in 2024, with the first cut expected during Q2. This will cause a corresponding decline in mortgage rates," says Russ Krivor, principal and CEO at Sovereign Properties, a real estate development firm.

This decline in interest rates could occur based on a cooling economy, which would lower prices and inflation. To some extent, that's already happening. "Domestically, inflation will recede as US consumer confidence wanes and consumer spending declines. We are seeing slower rent growth across our markets and nearly all U.S. markets," says Krivor.

Jerry Koors, president, Merchants Mortgage at Merchants Bank, agrees on this general direction, though it's hard to say exactly what will happen.

"The size of the drop is one of the more difficult things to predict, as rates have been heavily impacted by the Federal Reserve's actions in all of 2023, which were done in an effort to reduce inflation and dramatically affected mortgage rates. Industry experts are suggesting rates will improve — i.e., go down — steadily in 2024 but likely hover around 6%," he says.

He adds that he anticipates this improvement in mortgage rates to level off in the summer of 2024.

Rates could stay steady or even rise

While many experts predict mortgage rates will fall in 2024, it's important to remember that there's also a possibility that rates could remain flat or even go up if conditions like inflation take a turn for the worse. As Koors points out, there's already been some recent fluctuations. And while the consensus generally isn't pointing toward this scenario, it's certainly possible, at least in the beginning of 2024.

The CME FedWatch Tool shows that there's a 53.5% probability that rates will stay the same for the Fed's March 2024 meeting, though only a 0.1% probability that rates will stay in their current range by the Fed's December 2024 meeting.

As Idziak notes, there is "a 'higher for longer' camp that believes that the Fed and other central banks need to keep rates elevated for longer than the market expects in order to ensure that inflation is sustainably brought down. Fed officials have made some comments that support this idea, so there is the possibility that the Fed will wait an additional one or two meetings before cutting."

Indeed, in a recent speech, Fed chair Jerome Powell noted: "It would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease. We are prepared to tighten policy further if it becomes appropriate to do so."

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The bottom line

While these and many other experts foresee mortgage rates trending downward in 2024, predicted drops are generally expected to be relatively modest. Homebuyers generally aren't expected to see sub-3% rates like pandemic-era homebuyers did. But falling from around 7% to somewhere in the 6-6.5% range is plausible.

Still, predictions can change as new data comes in and unexpected events might cause the Fed to either raise rates again or cut them faster than anticipated. So, homebuyers might not want to get overly caught up in predictions and instead focus on factors more in their control, like shopping around for the best rates and finding a home that fits their budget.