Mortgage rates could reach 5.7% next year, but will sellers give up their 3% rates?
The U.S. economy is demonstrating greater resilience than previously anticipated, with mortgage rates projected to conclude 2024 at 6% and home-price growth showing upward momentum. These insights are derived from the Economic and Strategic Research (ESR) Group at Fannie Mae. The group now forecasts a decline in gross domestic product (GDP) growth from 3.2% in 2023 to 2.3% in 2024, and further to 2% in 2025. This is an upward revision from their June projections, which estimated GDP growth at 1.6% for 2024 and 1.9% for 2025.
The improved economic outlook is largely attributed to significant upward revisions in recent personal income data. Previously, the ESR Group anticipated a reduction in consumption growth due to its unsustainable rise relative to incomes. However, revised data now indicate that the relationship between income and consumption is more aligned with historical norms. Consequently, the ESR Group believes that the economy can sustain growth closer to its long-term potential, provided there are no unforeseen shocks to consumer or business confidence from adverse external events.
Following data revisions and recent employment figures, bond market expectations for rate cuts have become more aligned with the Federal Reserve’s latest Summary of Economic Projections. This alignment has led to a rise of over 40 basis points in the 10-year Treasury from its low in mid-September. This presents an upside risk to the ESR Group’s latest mortgage rate forecast, which now predicts the 30-year mortgage rate to end the year at 6.0%, a decrease from last month’s 6.2% projection, and to decline steadily to 5.7% by the end of 2025.
In terms of home prices, the ESR Group anticipates annual growth of 5.8% in 2024 and 3.6% in 2025, which are slight adjustments from their previous forecasts of 6.1% and 3%, respectively. Potential homebuyers have observed the decline in mortgage rates over recent months, but they are also aware that there has been minimal relief in home prices, which remain a significant factor in affordability challenges, particularly for first-time buyers.
The timing of the anticipated increase in home sales activity, as well as further moderation in home price appreciation, will partly depend on the willingness of current homeowners to sell their homes, thereby relinquishing their low mortgage rates. Continued robust homebuilding activity will also be crucial, as the shortage of national housing stock remains a primary barrier to affordability.
