Despite a cooling inflationary environment, the economy faced challenges as the Federal Reserve implemented multiple interest-rate hikes throughout 2023 that amounted to a cumulative one percentage point increase that exerted further pressure on borrowing. Consequently, title insurance premium volume decreased 35% through the first nine months of 2023. However, following two years of reduced activity, economists expect the housing market to grow in 2024. While several signs point to a market recovery, the outcome for the overall economy could play out differently.
Economy
While the U.S. economy has been resilient throughout 2023, the Mortgage Bankers Association (MBA) forecasts that the combination of higher interest rates, tighter credit conditions and a depletion of pandemicera household savings will lead to a mild recession in the first half of 2024.
“Both fiscal and monetary policies have contributed to the much higher level of mortgage rates in 2023,” said Mike Fratantoni, chief economist for the MBA. “The Fed’s hiking cycle is likely nearing an end, but while Fed officials have indicated that additional rate hikes might not be needed, rate cuts may not come as soon or proceed as rapidly as previously expected. Lower rates should help boost both homebuyer demand and increase the inventory of existing homes, thereby supporting purchase origination volume in 2024.”
He said the job market will likely slow entering 2024, with fewer jobs added and the unemployment rate increasing to 5% by the end of 2024. Inflation will gradually decline toward the Fed’s 2% target by the middle of 2025, according to Fratantoni.
Fratantoni believes that as the economy slows and inflation moves lower, longer-term rates will decline from current levels, helping to bring mortgage rates lower. However, the spread between mortgage and Treasury rates remains roughly 120 basis points wider than typical, due to a combination of factors. MBA’s baseline forecast is for mortgage rates to end 2024 at 6.1% and reach 5.5% at the end of 2025, as Treasury rates decline and as the spread narrows.
Lawrence Yun, chief economist for the National Association of Realtors (NAR), forecasts the U.S. GDP will grow by 1.5%, avoiding a recession, with net new job additions slowing to 1.7 million in 2024, compared to 2.7 million in 2023 and 4.8 million in 2022. After eclipsing 8% in late 2023, he expects the 30-year fixed mortgage rate to average 6.3% and that the Fed will cut rates four times this year—calming inflationary conditions—in response to slower economic activity.