Is the bottom in mortgage rates for 2024 finally in sight after a tumultuous year so far? My forecast for 2024 projected a range of 7.25%-5.75% for mortgage rates. To reach the lower end of this range, two key factors needed to align: a softening labor market and improved mortgage spreads. This double whammy effect has indeed materialized.
However, with three months still left in the year, could my lowest range forecast be incorrect? There are potential reasons why it might not hold true.
10-year yield and mortgage rates
My 2024 forecast outlined:
- A range for mortgage rates between 7.25%-5.75%
- A range for the 10-year yield between 4.25%-3.21%
The trajectory towards the lower end of the forecast range is crucial. The primary variable is the softening labor data, accompanied by improved spreads. This is not solely reliant on additional Fed rate cuts, as the market has already factored in significant cuts. What remains pivotal is a potential recession that has yet to be priced in. The chart below illustrates the unexpected rise in rates following a significant Fed rate cut, as discussed in this HousingWire Daily podcast.
With the 10-year yield currently at 3.74%, there is still room to potentially reach the bottom of the 2024 forecast range before the year concludes. However, achieving this would necessitate further weakening in labor and economic data, alongside improvements in spreads.
Mortgage spreads
In 2024, the mortgage spread scenario has been favorable compared to the negative trends witnessed in 2023. Significant progress has been made, with potential for further normalization towards historical averages. This could drive mortgage rates down towards 5.75%. If we were to incorporate the worst spreads from 2023 today, mortgage rates would be 0.68% higher. Despite the improvement, current spreads remain 0.85% higher than the lows of 2022, as depicted in the chart below.
Purchase application data
Recent weeks have seen positive growth in purchase applications, marking a four-week winning streak – the longest of the year. Despite a 0.4% year-over-year decline last week, this is the smallest drop since 2022. Notably, current mortgage rates are significantly lower compared to the same period last year when rates were headed towards 8%. The evolving data trends over the past 15 weeks indicate a substantial shift.