Relief On The Way - Could Mortgage Rates Fall In Second Half of 2024?

For the first time in months, The Federal Reserve (The "Fed") gave a slight glimmer of hope that an interest rate cut could be coming in the back half of 2024. So, what does that mean for mortgage rates?

The latest inflation numbers show that the economy is slowly improving. In fact, the latest Consumer Price Index numbers (or, what most of us refer to as "inflation") came in at 3.3% in June. While it is still a far cry from the Fed's goal of 2%, it is slightly lower than the reading in May. This has experts and citizens alike wondering if the improvement in the economic indicators will lead to a reduction in the federal interest rate, and with that, a drop in mortgage interest rates.

Speaking this week Fed Chairman Powell actually uttered the words "rate-cut" for the first time in quite a while. Powell had been careful in his wording over the last several weeks as the economy showed signs of improvement. But, to actually hear the Chairman mention a rate-cut, even in passing, was enough to get financial experts' attention. There is little to no chance of a cut coming when the Fed meets in July. In fact, the CME Group's FedWatch Tool has the probability of "No Change" at 91.2%. While that may not be what people want to hear, it does come with some good news.

The biggest positive to take away is that the rates are not expected to rise at the end of the month. And, when looking ahead to September, the probability of a rate reduction is 92.7%, and by November 2024, their projected probability that the Fed will ease the interest rate is a robust 96.7%. So, all indicators point to very good chance that we will see a rate cut before the calendar year of 2024 comes to a close.

But, what does that mean for mortgage rates the rest of this year? One of the biggest misconceptions is that as the federal interest rate goes, so goes mortgage interest rates. While it is traditionally true that as the Fed raises and lowers interest rates, mortgage rates generally fluctuate accordingly. That being said, keep in mind that we actually saw a small dip in mortgage interest rates in May and June, even though the Fed kept rates the same. Those numbers have since bounced back up some. It is well within reason to expect that a drop in the Fed rate will result in a drop of mortgage rates. However, don't expect a big shift. According to most recent projections by Fannie Mae and the Mortgage Bankers Association both predict a 6.6% rate on a 30-year mortgage by the end of the year. That's slightly lower than the average rate today. And, while it is still significantly higher than the 3% and 4% rates (or even lower in some cases) we've seen in the not-so-distant past, those numbers are still a fraction of mortgage rates that homebuyers had to deal with in the 1980s.

The highest average mortgage rate in history was 18.63% in October 1981, according to Rocket Mortgage. Can you imagine?! And, much like we've seen recently, those historic rates were the result of the federal interest rate being hiked to 22% in 1981 to combat inflation that had gotten out of control since the mid 70's. Because of this, mortgage rates remained high throughout most of the 1980s before finally starting to fall again in the early 90s.

So, what does it all mean? Well, as we've seen, a formal rate drop from the Fed isn't a requirement for mortgage rates to fall. Over the past few years, mortgage lenders have been more reactive to the economic data, rather than waiting on movement by the Federal Reserve. This has been helped by the fact that members of the Fed have been good about communicating about the current economic landscape and how they intend to approach it. Ultimately, it boils down to the fact that better days appear to be on the horizon. And, in the grand scheme of things our current rates are still not that bad, when compared to some of the rates that past homebuyers have had to deal with. And, as always, boosting your credit score, paying down your other outstanding debts, and even making a larger down payment can help reduce your mortgage rates, regardless of what the Fed does.