Mortgage rates to stay high in 2024, predicts Freddie Mac. But will strong demand overcome affordability challenges? Let's explore what this means for homebuyers. Freddie Mac, a leading provider of mortgage financing in the U.S., reports a slowdown in the housing market attributed to rising mortgage rates.
According to Freddie Mac's Primary Mortgage Market Survey®, rates climbed in April, averaging 6.99% for the month and ending at 7.17%. This increase led to a significant decrease in overall mortgage activity, down 1.8% month-over-month and 10.4% year-over-year. Both refinance applications, fueled by historically low rates in previous years, and purchase applications for new homes saw a decline.
Mortgage Rate Outlook for 2024
“Mortgage rates trending higher have unfortunately priced out many potential homebuyers,” said Freddie Mac's Chief Economist, Sam Khater, in a previous press release [Freddie Mac Mortgage Rates Trending Lower, April 6, 2023]. “Those in the market are facing a number of challenges, not the least of which is the low inventory of homes for sale, especially for aspiring first-time homebuyers.”
Beyond Mortgage Rates: Tight Inventory Persists as a Hurdle
While rising mortgage rates are a significant factor impacting affordability, Freddie Mac also highlights the ongoing issue of limited housing inventory. The low supply of existing homes for sale continues to be a barrier to homeownership, especially for first-time buyers. This tight supply, coupled with strong demographic trends driving demand, has put upward pressure on house prices, further straining affordability for some.
Homeownership Rate Dips, Reflecting Market Challenges
Reflecting the challenges in the market, Freddie Mac reports a slight decrease in the homeownership rate in the first quarter of 2024 compared to previous quarters. This suggests that a smaller share of the population is achieving homeownership, potentially due to affordability constraints.
Outlook for 2024
Looking ahead, Freddie Mac's baseline scenario predicts that mortgage rates will remain elevated for most of 2024. This is likely to result in a modest increase in home sales compared to 2023, but high interest rates may continue to price out some potential buyers. However, Freddie Mac also acknowledges the presence of favorable demographics, particularly among millennials entering prime first-time homebuyer age, which could help sustain demand despite higher rates.
Mortgage Origination Market: Mixed Signals Amidst High Prices
The outlook for the mortgage origination market is mixed. While high home prices could lead to modest growth in overall origination volume due to larger loan amounts, limited inventory and high rates could restrict the number of purchase loans originated. Refinance activity is also expected to decline further as homeowners have already locked in lower rates in previous years.
Inflation Risks: A Potential Double-Edged Sword
A key risk identified by Freddie Mac is the potential for continued inflation, particularly in the housing sector. Persistent inflation could keep interest rates high, negatively impacting economic growth and consumer spending, further dampening housing demand. However, on the other hand, continued inflation could also lead to an increase in home valuations, potentially benefiting existing homeowners.
A Market in Transition: Potential Silver Linings
The housing market is currently navigating a period of transition. Rising mortgage rates and tight inventory are presenting headwinds for some potential buyers. However, Freddie Mac acknowledges the presence of underlying strength in housing demand, fueled by demographics. Additionally, new home construction, though down slightly month-over-month in March, has shown resilience compared to existing home sales. This suggests that builders may be anticipating future demand and starting to address the inventory shortage.
Room for Optimism: Addressing Inventory and Affordability
As the market adjusts to the new interest rate environment, it will be crucial to monitor factors like inflation and inventory levels to understand the long-term direction of the housing market. Freddie Mac also emphasizes the need for additional housing stock to bring vacancy rates in line with historical averages and alleviate pressure on housing affordability. Addressing the supply side of the equation will be essential for a healthy and sustainable housing market moving forward.
Furthermore, Freddie Mac can play a significant role in supporting a stable housing market through its mission. By providing liquidity and stability to the mortgage market, Freddie Mac can help ensure that financing remains available for creditworthy borrowers, even during periods of economic uncertainty. Additionally, Freddie Mac's advocacy efforts can focus on policies that promote affordable housing options and encourage the development of new housing units.
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