Mortgage rates barely changed this week, but experts still expect further declines in 2024.
The average rates for 30-year loans inched up to 6.62% from 6.61% a week ago, according to tracking by Freddie Mac on Thursday. Aside from this week's minuscule rise, rates have been declining for weeks since late October, falling nearly 117 basis points from a 12-month high of 7.79% at the end of October.
Those recent declines have boosted homebuyers' ability to purchase homes, but further affordability improvement could be curbed by a continual supply shortage, especially if lower rates bring back sidelined demand.
"While mortgage interest rates are expected to overall decline in 2024, minor fluctuations in weekly mortgage interest rates are to be expected," Jessica Lautz, National Association of Realtors’ deputy chief economist, wrote to Yahoo Finance.
"The biggest demand is likely to come from those who had been priced out of the homebuying market. For spring, there will likely be competition among the steady share of all-cash homebuyers and first-time buyers trying to edge in," Lautz added.
Read more: Mortgage rates decline. Is 2024 a good time to buy a house?
Rate drop improving affordability
The national median monthly mortgage payment on purchase applications fell by $62 to $2,137 in November from the month prior, according to the Purchase Application Payments Index (PAPI).
"Homebuyer affordability improved in November, with a decline in mortgage rates, providing relief to prospective homebuyers," Edward Seiler, MBA's associate vice president, said in a press release. "MBA expects that affordability conditions will continue to improve as mortgage rates decline, which should generate increased demand heading into the spring homebuying season."
A decrease in PAPI — indicating stronger affordability — can be attributed to a reduction in borrowed loan amounts, a drop in mortgage rates, and an increase in incomes.
However, homebuyers' ability to afford homes is still lower than a year ago. Mortgage applicants are paying $160 more, or 8.1% higher, each month compared to the national median mortgage 12 months ago. While rates didn’t increase substantially this week, homebuyers today are still paying 14 basis points more than 12 months ago, when the average 30-year mortgage rate was 6.48% on Jan. 5, 2023, according to Freddie Mac rates archive.
Read more: How to buy a house in 2024
Many experts are predicting further rate drops in 2024, though. As the US economy is expecting a soft landing — where inflation curbs without a national recession — rates are poised to drop to around 6% or potentially lower by the end of 2024.
"If inflation continues to show signs of improvement and the bond market remains less turbulent than during much of 2023, mortgage rates should at the very least stabilize this year, if not show sustained declines," Jacob Channel, LendingTree's senior economist, predicted for 2024 housing and economic market.
Affordability curbed by lack of listing
Housing experts warned that limited inventory could restrain affordability improvement achieved by declining rates. Without adequate supply, sidelined prospective buyers returning to the market could outpace the housing supply and increase competition.
"Homeowners may still be reticent to move from low interest rate mortgages, which may be in the 2.5% to 3.5% range, until they are in a situation where a life or job change occurs forcing them to reconsider their living situation," Lautz said.
Total inventory of unsold existing homes, not including new constructions, declined 1.7% from the previous month to 1.13 million units at the end of November, according to the National Association of Realtors. This is the equivalent of 3.5 months of supply on the market, nearly 2.5 months lower than what experts believe to be a balanced and healthy market of 6 months.
For context, today's existing home inventory levels are relatively close to the record low of 860,000 units in January 2022 compared to the record high of 4.04 million units in July 2007.
But inventory could still see a slight uptick as more sellers reach their "tipping point," or the rate level at which homeowners are willing to sell their homes. Most homeowners — nearly 92% — have rates below 6%, Redfin says. But as rates drop to 6% or below, more owners could be open to selling. This would reverse the mortgage rate lock phenomenon that slowed the housing market in 2023 when most homeowners refrained from selling to keep their lower-than-market rates.
However, experts don't expect a significant jump in inventory that could bring down home prices, as roughly 4 in 5 homeowners still have rates below 5%, and one-quarter have rates below 3%.
"We are not going to see a big turnaround," Danielle Hale, Realtor's chief economist, said on 2024's affordability challenges during NAR's Real Estate Forecast Summit. "But I do think we are going to see baby steps in the right direction."
Rebecca Chen is a reporter for Yahoo Finance and previously worked as an investment tax certified public accountant (CPA).
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