Will mortgage rates go down in 2024?

In recent years, potential homebuyers have experienced whiplash as they watched mortgage rates and home prices shoot through the roof.¹ Will mortgage rates go down in 2024 and 2025? And will home-price growth cool?

The good news: With the U.S. Federal Reserve widely expected to begin cutting its benchmark interest rate in 2024, mortgage rates could drop as well—at least slightly.² But that doesn’t necessarily mean a return to the pre-pandemic era of more affordable mortgages and home prices. If you’re considering entering the market this year, here’s what you should know.

For most of the decade following the Great Recession in 2007-09, the average 30-year fixed mortgage rate hovered around 5%.³ Then came the COVID pandemic in 2020, when the Fed cut rates in hopes of stimulating the economy, which helped bring the average 30-year mortgage rate as low as 2.65% in early 2021.3 Such ultra-cheap mortgage rates helped unleash a wave of homebuying that, combined with limited housing supply, caused home prices to soar.

But decades-high inflation then spurred the Fed to begin hiking its benchmark rate, helping drive the average 30-year fixed mortgage to spike to nearly 7.80% by October 2023, its highest rate in more than 20 years.³

With inflation recently appearing to gradually settle closer to the Fed’s 2% target and Morgan Stanley Research expecting three Fed rate cuts this year, of 25 basis points each, starting in September, mortgage rates are likely to come down somewhat this year.¹ Morgan Stanley strategists expect 30-year mortgage rates will stabilize around 6.25% by the middle of 2025.¹

This potential decline from the near-8% peak in 2023 may translate to modest improvements in housing affordability. For example, a 30-year mortgage for $417,700 home—the median U.S. sale price in the fourth quarter of 2023—might cost about $2,406 per month at an interest rate of 7.8%, but $2,112 at a rate of 6.5%—a savings of about $295 a month.^4,5

Of course, home prices may vary widely by market and property type. For a $1 million home, the monthly cost could be nearly $5,759 at the latest peak rate of 7.8%, versus $5,057 at 6.5%—a roughly $700 difference.^4,5

Homes are generally less affordable today, with prices up about 54% since 2019.² That means, for example, that a $500,000 home in 2019 may now list for $770,000. Part of the issue: With mortgage rates still high by recent historical standards, many homeowners who already locked in much lower rates prior to the Fed’s hikes have a strong incentive to hold onto their current home. This creates a “lock-in effect” that helps sustain upward pressure on prices as far fewer existing homes come on the market.

As mortgage rates potentially come down, Morgan Stanley strategists expect the inventory of for-sale homes to increase from historical lows. However, a still-sizeable lock-in effect may keep the supply of homes constrained and prevent sales volumes from increasing too much. In this environment, Morgan Stanley strategists forecast that growth in home prices will slow to 2% this year and then rise to 3% in 2025.¹

If rates decline in 2024, as currently expected,¹ home-refinance activity may gain momentum, most likely among borrowers who purchased homes when rates were peaking near 8% in fall 2023.⁶

To assess if refinancing makes sense for you, look at factors such as your current mortgage rate relative to the indicative rate—all in the context of your longer-term financial plan.

Homeowners who locked in low mortgage rates and saw their homes increase in value since the pandemic or earlier hold a strong hand and likely don’t feel forced to sell in most cases. At the same time, this may be an ideal time for some to lock in post-pandemic gains in home equity, especially for homeowners ready to downsize or move to a new city.

Ultimately, whether now is the right time to buy or sell a home can be just as much a personal decision as it is an economic one. For example, a young couple starting their family may be willing to pay a premium to get into a specific school district, while a retiree may be ready to buy their dream vacation home while they can enjoy it. For many of today’s buyers, there is also the hope that they can refinance down the road to lower their costs, making it an easier choice to buy at a higher rate now.  

Whatever your circumstance, review your financing options and evaluate how today’s mortgage rates and home prices could affect your overall financial plan.

• Morgan Stanley strategists expect the average 30-year fixed mortgage rate to stabilize around 6.25% by the middle of 2025,¹ down from nearly 7.8% in fall 2023.
• Despite a slight drop in rates, home prices have leapt 54% since 2019² and are expected to continue rising through 2025.¹
• The decision of whether and when to buy a home is both economic and personal, with many buyers hoping to refinance in the future.

¹ “Global Strategy Mid-Year Outlook: Sunny with a Chance of Rain,” Morgan Stanley Research, May 19, 2024 (as of May 22, 2024)

² Source: https://www.washingtonpost.com/business/interactive/2024/housing-market-price-trends-zip-code-map/ (as of May 22, 2024)

³ Source: https://fred.stlouisfed.org/series/MORTGAGE30US (as of May 22, 2024)

⁴ Assumes a 20% downpayment. Figures does not include property tax or insurance costs.

⁵ Source: https://www.bankrate.com/mortgages/mortgage-calculator/ (as of May 22, 2024)

⁶ Source: https://www.forbes.com/advisor/mortgages/mortgage-interest-rates-forecast/ (as of May 22, 2024)

The source of this article, “Will Mortgage Rates Go Down in 2024?,” was originally published by Morgan Stanley Wealth Management on May 30, 2024. All facts and figures contained in this article are from Morgan Stanley Research.