Mortgage rates drop and further declines may be on the way

Mortgage rates dropped 6 basis points from last week even as the benchmark 10-year Treasury yield hit its highest point in over a month, Freddie Mac reported.

The 10-year Treasury has been on the rise since last week's inflation report. However mortgage rates can be influenced by other factors, including secondary market pricing.

Mortgage rates now above 6% should fall below that level by the end of the year, Fannie Mae's January housing forecast, which was also issued this morning, declared. Furthermore, that government-sponsored enterprise backed off its call for a recession this year.

Instead, the U.S. will have positive economic growth, albeit below the normal trend, Fannie Mae forecast.

Freddie Mac's Primary Mortgage Market Survey for Jan. 18 put the average for the 30-year fixed rate loan at 6.6%, versus 6.66% one week prior and 6.15% for the same time in 2023. It is the first decline in the rate in three weeks.

The 15-year FRM, which had declined in recent weeks, continued its slide, falling 11 basis points to 5.76% from 5.87%. A year ago, it was at 5.28%.

This is the  lowest level for mortgage rates since May, Freddie Mac said.

"This is an encouraging development for the housing market and in particular first-time homebuyers who are sensitive to changes in housing affordability," said Sam Khater, Freddie Mac's chief economist in a press release. "However, as purchase demand continues to thaw, it

will put more pressure on already depleted inventory for sale."

But on Jan. 18, the 10-year Treasury rose as high as 4.13%, a level not seen since Dec. 13, 2023, when it peaked at 4.19%. The yield closed at 3.98% on Jan. 11. That suggests there are mixed signals in the market.

The 30-year FRM should nevertheless reach 5.8% in the fourth quarter of 2024, and fall further to 5.5% by the same quarter next year, and that should boost refinance production, said Doug Duncan, Fannie Mae's chief economist, in a press release. This compared with 6.5% and 6.1% in his December economic outlook. 

"However, even at less than 6%, we think rates will still have a significant way to go in order to meaningfully reduce the 'lock-in effect' experienced by homeowners who refinanced or bought during the pandemic," Duncan said. "Overall, we expect 2024 to be a better year than 2023 for homebuyer affordability and the mortgage industry."

Duncan boosted his refinance forecast for 2024 versus December by 9% to $490 billion from $451 billion. The 2025 refi prediction now calls for $752 billion of refis, up from $686 billion in December.

The purchase mortgage outlook was also boosted for this year and next, to $1.49 trillion and $1.69 trillion respectively, from $1.43 trillion and $1.62 trillion in December. Total volume in 2024 is now expected to reach $1.98 trillion and for 2025, $2.44 trillion.

Duncan also dropped his estimate of 2023 total volume to $1.53 trillion to just under $1.5 trillion.