December’s abrupt decline in mortgage interest rates seems to have jumpstarted the upcoming spring housing market. The rates have plummeted by nearly a full percentage point since October, fueling consumer expectations of further decreases.
According to Fannie Mae’s monthly consumer survey, optimism regarding mortgage rates soared in December. Mark Palim, Fannie Mae’s deputy chief economist, highlighted a remarkable shift: for the first time since the survey’s inception in 2010, a larger number of homeowners believe rates will decrease instead of rising.
Palim attributed this shift to the recent bond market rally, noting that homeowners and higher-income groups displayed greater confidence in rate decline compared to renters.
The journey of the 30-year fixed-rate mortgage has been turbulent since the onset of the COVID-19 pandemic. Experiencing over a dozen record lows in 2020 and 2021, dipping below 3%, it spurred a historic surge in home purchases and a significant hike in prices. However, the rates more than doubled in 2022, hitting a 20-year high in October 2023 around 8%, before receding below 7% in December. Yet, these rates remain twice the levels from three years ago.
Buyers are reemerging in the market. Real estate agent Paul Legere in the Washington, D.C. area witnessed heightened activity during open houses for homes priced between $1.1 million to $1.2 million, marking the busiest period in the past year.
“There’s a noticeable resurgence among potential buyers who had previously slowed or paused their search due to market conditions,” Legere shared.
Anticipating an influx of inventory in the coming weeks, Legere expects this to alleviate the tight supply that has been keeping prices elevated, offering hope to potential buyers.
Palim echoed this sentiment, indicating that the improved outlook on mortgage rates might encourage homeowners to list their properties for sale, thereby increasing the availability of existing homes in the market.
Recent data from Redfin supports this optimism, indicating a rise in demand as rates dropped. Their Homebuyer Demand Index climbed by 10% in December, hitting its peak since August. Although pending sales on existing homes were slightly down from December 2022, it marked the smallest decline in two years.
The future of the housing market hinges on the trajectory of both interest rates and home prices. Despite the ongoing price escalation due to limited supply, a continued drop in rates could further accelerate these price gains, potentially enhancing affordability for prospective buyers.
However, the prospect of further rate reductions remains contingent on the economy’s strength and the inflation rate.
Matthew Graham, chief operating officer of Mortgage News Daily, highlighted this connection between rate movement and economic indicators. He suggested that if economic data continues its current trend, rates could potentially dip into the 5% range, or even the high 4% range if speculations about a 2024 recession hold true.
Although the average 30-year fixed mortgage rate hit a recent low of 6.61% in December, it has seen a marginal uptick this month to 6.76%, according to Mortgage News Daily.