A sharp decline in mortgage rates in December may have given an early start to this year's spring housing market. Interest rates are about a full percentage point lower than they were in October, and consumers expect them to fall even further.
Optimism about mortgage rates rose sharply in December, according to a monthly consumer survey from Fannie Mae. For the first time since the survey began in 2010, more net homeowners believe interest rates will fall rather than rise, according to Mark Palim, deputy chief economist at Fannie Mae.
“This significant shift in consumer expectations follows the recent rally in the bond market,” Palim said. “In particular, homeowners and higher-income groups reported greater interest rate optimism than renters.”
The average 30-year fixed interest rate has been on a wild rise since the start of the Covid pandemic. It hit more than a dozen record lows in 2020 and 2021, below 3%, leading to a historic rush in home purchases and a sharp rise in prices, before more than doubling in 2022. In October, interest rates reached a more than 20-year high. In 2023, the value fluctuates around 8% before falling back below 7% in December. However, interest rates are still twice as high as they were three years ago.
Ryan Paredes (R) and Ariadna Paredes look at a home shown to them by Ryan Ratliff, a real estate salesperson with Re/Max Advance Realty, on April 20, 2023 in Cutler Bay, Florida.
Joe Raedle | Getty Images News | Getty Images
The buyers are coming back. Washington, D.C.-area real estate agent Paul Legere hosted two open houses over the weekend — homes in the $1.1 million to $1.2 million price range — and said they were the busiest he's seen in the last year have experienced.
“Similar report from my colleague,” he added. “Even on Saturday, during the pouring rain, we both had over 10 groups of active buyers. These were people who were in the market and slowed down or put their search on hold and are now coming back seriously looking for a new property.”
Legere said he expects an “infusion” of inventory in the next week or two. Tight inventory has helped keep prices higher, posing another hurdle for would-be homebuyers.
“Homeowners have repeatedly told us recently that high mortgage rates are the main reason why it is both a bad time to buy or sell a home and that the outlook for mortgage rates may therefore be more positive [incentivize] Some are putting their homes up for sale, helping to increase the supply of existing homes in the new year,” Palim said.
According to a recent report from Redfin, a national real estate brokerage, demand began to increase in December as interest rates fell. According to the report, Redfin's Homebuyer Demand Index – a seasonally adjusted measure of requests for tours and other home buying services from Redfin agents – rose 10% month over month to its highest level since August. Pending sales, which measure signed contracts on existing homes, fell 3% from December 2022, but that was the smallest decline in two years.
Much will depend on both interest rates and property prices in the coming months. Due to the lack of supply, prices continue to rise, and if interest rates continue to fall, price increases could accelerate. The lower the interest rate, the more potential home buyers can afford.
While mortgage rates are expected to continue to fall, this will depend on the strength of the economy and inflation.
“The interest rate dynamics are as good as the development of the economic data. So if the data continues to do what it's been doing, there's no reason why rates can't go down into the 5s, possibly even into the high 4s if some of the discussions are talking about that.” “The heads are right about the recession in 2024,” Matthew Graham, chief operating officer of Mortgage News Daily, said on CNBC’s “The Exchange.”
According to Mortgage News Daily, the average interest rate on a 30-year fixed mortgage hit a low of 6.61% at the end of December but has increased slightly to 6.76% this month.