A rendering of a home in the country with a downward arrow and a percentage sign.
Illustration by Lanette Behiry/Real Estate News

Mortgage rates drop to lowest level in 8 months 

Lower rates are good news for buyers, but increased demand could further erode limited inventory.

January 18, 2024
3 minutes

Key points:

  • The 30-year fixed-rate mortgage averaged 6.6% this week, down from 6.66%, according to Freddie Mac.
  • That decline came even as inflation ticked up in December, which could delay the rate cuts many expected to see in the coming months.
  • Mortgage applications also rose, particularly for refinance loans.

Despite economic data that could delay cuts at the federal level, mortgage rates trended downward this week.

The 30-year fixed-rate mortgage averaged 6.6%, according to the Freddie Mac survey. That's down from last week's 6.66% and the lowest level since May. The 15-year mortgage rate also fell to 5.76%, down from 5.87%.

While an encouraging development for first-time homebuyers, declining rates have a downside, said Sam Khater, Freddie Mac's chief economist. If mortgage rates continue to fall, demand will increase at a time when inventory remains low.

Mortgage applications increase — which could mean higher prices

Some of that anticipated buyer demand is already starting to return. The Mortgage Bankers Association reported that mortgage applications increased 10.4% compared to a week earlier, though much of that activity was in the refinance area. This is the second week that applications have increased by about 10%.

"If rates continue to ease, MBA is cautiously optimistic that home purchases will pick up in the coming months," said Joel Kan, MBA's deputy chief economist.

But higher demand could mean a housing market similar to last spring, where rates dropped and inventory disappeared, leading to a rise in home prices and worsening affordability.

"We should not expect home prices to stay flat as mortgage rates decline," said Lisa Sturtevant, chief economist at Bright MLS.

Volatility expected in the short term, but rates could dip below 6% by year-end

This week's drop in rates comes despite higher inflation in December and retail sales that came in stronger than expected. That economic news could prompt the Federal Reserve to keep its current rates in place longer than expected, said Realtor.com Economist Jiayi Xu. Many investors forecasted rate cuts starting as early as March.

"Looking forward, more volatility in mortgage rates is possible as the economy experiences uneven improvement," Xu said.

In the short term, the current 6.6% rate could be the bottom. Mortgage News Daily shows the 30-year rate rising, coming in at 6.89% on Jan. 18. Longer term, however, Fannie Mae's research group now predicts rates will end the year below 6%. A previous forecast from Fannie Mae had rates pegged at 6.5% at the end of 2024.

"While we think financial markets may have gotten ahead of themselves regarding the extent of Federal Reserve rate cuts this year, the outlook for both short-term rates and mortgage rates is now decidedly lower than what we had previously forecast," the report authors noted.

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