Will Mortgage Rates Drop Below 6% This Year?

If you are planning to buy a home or refinance in 2024, you are likely watching mortgage rates very closely. After peaking near 8% in late 2023, rates have slowly started to fall. The biggest question on everyone’s mind right now is whether we will see the 30-year fixed mortgage rate drop below 6% before the year ends.

The Current State of Mortgage Rates

To understand where rates are heading, we first need to look at where they stand today. According to Freddie Mac, the average rate for a 30-year fixed mortgage hovered around 6.2% to 6.35% in September 2024. This is a massive improvement from October 2023, when rates hit a staggering 7.79%.

While the recent drop has brought some relief to homebuyers, breaking the 6% barrier is a tough psychological and economic hurdle. Rates for 15-year fixed mortgages have already dipped below 6% at several major lenders, but the highly popular 30-year fixed rate remains stubbornly above that line.

The Federal Reserve and the 10-Year Treasury Yield

Many people assume the Federal Reserve directly controls mortgage rates. In reality, the Fed only sets the federal funds rate, which is the interest rate banks charge each other for overnight loans.

On September 18, 2024, Federal Reserve Chair Jerome Powell announced a 50-basis-point cut to the benchmark interest rate. While this rate cut directly lowers the cost of credit cards and auto loans, it does not instantly guarantee cheaper mortgages.

Instead, fixed mortgage rates are tied closely to the 10-year Treasury yield. Investors buy Treasury bonds as a safe haven. When inflation cools down and the economy shows signs of slowing, investors buy more bonds. This drives the bond yields down. Mortgage lenders then lower their rates to stay competitive. Currently, the 10-year Treasury yield sits around 3.7%. For mortgage rates to comfortably drop below 6%, the 10-year yield likely needs to fall closer to 3.2% or 3.3%.

Expert Predictions for the Housing Market

Leading real estate and financial organizations constantly update their forecasts based on inflation data, job reports, and housing inventory. Here is what the major players predict for the remainder of 2024 and the start of 2025.

Fannie Mae

Fannie Mae expects the 30-year fixed rate to finish 2024 at exactly 6.4%. Their economists predict a very slow, gradual decline. According to their latest housing forecast, buyers should not expect rates to drop into the 5% range until the second or third quarter of 2025.

Mortgage Bankers Association (MBA)

The Mortgage Bankers Association is slightly more optimistic. Their baseline forecast suggests the 30-year fixed rate will end 2024 at 6.3%. They anticipate a faster economic cooling, which could push rates down to 5.9% by the middle of 2025.

National Association of Realtors (NAR)

Lawrence Yun, the Chief Economist for the National Association of Realtors, anticipates that rates will bounce between 6% and 6.5% for the rest of the year. He notes that while inflation is moving in the right direction, the U.S. government’s high budget deficit is putting upward pressure on bond yields, which keeps mortgage rates from falling faster.

What This Means for Home Prices

You might think that waiting for a 5.9% interest rate is a smart financial move. However, you have to consider how lower rates impact home prices.

There is a severe housing shortage in the United States. According to the NAR, the median existing-home sales price reached $416,700 in the summer of 2024. Total housing inventory sits at roughly a four-month supply. A healthy, balanced market usually requires a six-month supply.

If mortgage rates drop below 6%, thousands of buyers who have been waiting on the sidelines will rush back into the market. This surge in buyer demand will lead to intense bidding wars. You might secure a lower interest rate, but you could end up paying $20,000 or $30,000 more for the house itself.

Strategies for Homebuyers Right Now

If you want to buy a house today without paying a 6.5% interest rate, you have a few practical options. You do not have to wait for the national average to drop.

  • Look into Adjustable-Rate Mortgages (ARMs): A 5⁄1 or 7⁄1 ARM keeps your interest rate fixed for the first five or seven years of the loan. Lenders like Navy Federal Credit Union and Chase Bank often offer ARM rates that are a full half-percentage point lower than their 30-year fixed options.
  • Negotiate a Rate Buydown: Many builders and motivated sellers are offering 2-1 rate buydowns. In this scenario, the seller pays cash at closing to lower your interest rate for the first two years. If your base rate is 6.5%, your rate would be 4.5% in year one, 5.5% in year two, and 6.5% for the remainder of the loan. Companies like Lennar and D.R. Horton frequently offer these incentives on new construction homes.
  • Pay for Discount Points: You can pay upfront fees directly to your lender to permanently lower your interest rate. One discount point typically costs 1% of your total loan amount and lowers your interest rate by roughly 0.25%.

While the experts agree that a sub-6% mortgage rate is unlikely to happen nationwide in 2024, the downward trend is clear. Rates are falling, housing inventory is slowly creeping up, and buyers finally have a bit more breathing room than they did a year ago.

Frequently Asked Questions

Does the Federal Reserve set mortgage rates? No. The Federal Reserve sets the federal funds rate, which impacts short-term borrowing. Fixed mortgage rates are determined by the open market and track closely with the 10-year Treasury yield.

What is a good mortgage rate right now? As of late 2024, anything between 6.0% and 6.4% for a 30-year fixed conventional loan is considered a very competitive rate. Borrowers with excellent credit scores (above 760) and a 20% down payment will secure the best available rates.

Should I lock in my mortgage rate today? If you are within 30 to 45 days of closing on a home, locking your rate is generally the safest choice. While rates might drop slightly, they can also spike unexpectedly if a monthly inflation report comes in higher than expected. Some lenders offer a “float down” option, which allows you to lock your rate but still take advantage if rates drop before your closing date.

Will home prices drop if mortgage rates go down? Historically, the opposite happens. When mortgage rates go down, borrowing money becomes cheaper. This brings more buyers into the market. Because housing inventory is currently very low, this increased demand will likely push home prices higher.