Opinion: Will We See 4.13% Mortgage Rates in 2024?

Homebuyers and homeowners alike want to know: will mortgage rates go down in 2024?

Buyers are desperate to break into the market. But many can't qualify at today's rates.

Homeowners who purchased since late 2022 want to refinance to cut their mortgage payments.

Is there hope in ‘24? Here’s what rates might do.

Mortgage Rate Forecasts 2024 From Housing Authorities

A good place to start is forecasts from major housing agencies. These organizations pour many hours into forecasting economic and housing data.

Unfortunately, mortgage rates are particularly hard to predict. That’s why it’s useful to look at an average of all forecasts for a general direction for rates in 2024.

According to this method, the 30-year fixed mortgage rate might be in the mid-6% range by mid-to-late 2024.

Everything Could Change In One Minute

Predictions are nice, but forecasting mortgage rates is nearly impossible. It’s similar to picking the price of a stock in six months or where the S&P 500 will be in a year.

After all, mortgage rates and the stock market are driven by the same force: markets. And markets are intensely unpredictable.

For example, cruise line stocks may have seemed like a great idea in September 2019. Not so much during the third week of March 2020.

Those who are a little older will remember September 15, 2008, the day Lehman Brothers collapsed. It was a 158-year-old company that was the symbol of financial strength. The event spurred a 4.5% drop in the Dow Jones Industrial Average and changed everything in the U.S. economy going forward.

A smaller example is when Donald Trump was elected in 2016. Mortgage rates shot up about 0.8% between November 3 and December 29, 2016 according to Freddie Mac. Why? Because markets had priced in a Hillary Clinton victory, but a Trump presidency was expected to bring faster growth and higher inflation. (Mortgage rates rise in stronger economies and inflationary environments.)

Mortgage rates move wildly based on these black swan events. Nearly no one predicts them. If they do, they are not taken seriously (such as Michael Burry of Big Short fame).

Despite the best forecasts in the world, everything could change in one minute.

Recession Could Drive Down Rates By July 2024

Now that I’ve said that all mortgage rate predictions are worthless, I’m going to make one.

It’s based on the inverted yield curve that has accurately predicted 10 recessions with only one false positive since 1955.

An inverted yield curve occurs between six and 24 months before the start of a recession.

Strangely enough, the yield curve even seems to have predicted the pandemic, briefly inverting on August 29, 2019, almost exactly six months before the start of the COVID-19 shutdowns. While the yield curve isn't that omniscient, the timing is interesting.

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What is an inverted yield curve?

An inverted yield curve is when long-term bond yields are lower than short-term ones. Often, economists compare 10-Year and 2-Year Treasury bonds.

In a normal market, long-term bonds pay higher interest rates than short-term bonds. For instance, a 10-year Treasury bond might pay 4% interest and a 2-year Treasury pays 2%. That often inverts before a recession, such as if the 10-year pays 4% and the 2-year pays 4.1%. That’s a -0.1 inversion of the yield curve.

The current yield curve inversion is -0.45 and hit -1.06 in June 2023.

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So when will the next recession hit as predicted by the inverted yield curve?

Looking at Federal Reserve data, the yield curve first briefly inverted on April 1, 2022. It then returned to positive territory until July 6, 2022. It inverted again and remains so as of this writing.

Remember that recessions have started between six and 24 months from the yield curve inversion.

On January 1, 2024, it will have been 21 months since the first brief inversion, and 18 months since the more obvious, long-term inversion.

If history holds true, the U.S. economy could slip into recession between April and July 2024 which would be the 24-month marks from the two yield curve inversions.

No one is hoping for a recession. After all, it’s better to have a job to pay a 7% mortgage rate than have no job. But a common byproduct of recession is lower mortgage rates. This benefits certain segments of the economy, such as employed homeowners and homebuyers.

Could Rates Drop to 4.13%?

Again, we’ll look at history to predict how much rates could fall during a recession.

For most of the last 25 years, mortgage rates have ranged between 1.5% and 2.25% above the 10-year Treasury yield.

For example, if the 10-year yields 3%, mortgage rates should be between 4.5% and 5.25%.

The post-Great Recession average spread is 1.70%.

Lately, mortgage rates are high because the 10-year yield is closer to 4.5 or 5.0%. To add insult to injury, the spread between the 10-year yield and mortgage rates is closer to 3.0, resulting in rates near 8%.

In 2024, mortgage rates could drop because both factors could improve:

1. 10-year yield drops as recession hits

2. 10-year yield / mortgage rate spread normalizes

One caveat is that the mortgage rate spread can increase during recessions. But seeing that the spread is near all-time highs in expectation of recession, it’s unlikely to go higher in a recession.

Here are a few possible scenarios assuming a recession-induced retreat in the 10-year Treasury yield.

There are infinite combinations of the 10-year yield and mortgage rate spread, including higher rates for 2024.

Rates are wildly unpredictable. A black swan event could push markets much farther – in any direction – than anyone thought possible.

Despite all the talk of lower rates, there’s still upside due to factors that no one could predict.

Are Low Rates Good or Bad?

A mortgage rate in the 5s or even 4s would open opportunities for today’s homebuyers, but it could also spawn plenty of grief.

Armies of buyers would march into neighborhoods, searching for the few homes on the market. Bidding wars and unsustainable home price growth would return.

And if you're counting on a recession to increase distressed sales, the recession could come for your job just as easily as anyone else's.

Homebuyers may wish for the good old days of a decent economy and 7% mortgages.

When it comes to mortgage rates, extremes don't pay. A mild drop to the mid-6s plus no recession is about the best outcome anyone could hope for.