Mortgage rates to stay elevated on inflation worries, Freddie says

Freddie Mac's latest economic forecast calls for mortgage rates to remain at 6.5% for the first half of the year as the Federal Reserve reacts to the latest news regarding inflation.

In the near-term, Freddie Mac economists expect a growing economy to keep inflation above the Fed's 2% target.

"Therefore, we expect the Federal Reserve to not cut rates until the summer at the earliest and potential upside surprises on inflation could push rate cuts out even further," a blog posting from Freddie Mac's economists, led by Sam Khater, said. "As a result, treasury yields will remain elevated in the near term, keeping mortgage rates elevated."

Last month, Freddie Mac had predicted rates to remain at 6.5% in the first quarter and trend down to 6% by year-end.

The most recent Primary Mortgage Market Survey put the 30-year FRM at 6.87%, up 13 basis points from the prior week.

Meanwhile, the economists at the Mortgage Bankers Association in its March forecast now calls for 2024 volume to be a tick higher than it expected in February.

The trade group's latest outlook is for $2.01 trillion of volume this year, compared with $2 trillion in the February forecast.

The MBA did not change its 2025 or 2026 projections of $2.34 trillion and $2.44 trillion respectively.

Previously, Fannie Mae dropped its 2024 forecast by $15 billion in March, and for 2025, reduced it by $16 billion. That change was largely driven by Fannie Mae revising its rate forecast to now call for the 30-year fixed rate loan to remain above 6% through the end of 2025.

On the other hand, the MBA remains of the view that the 30-year FRM will sink back below 6% next year, although it ends this year at 6.1%; portions of its rate outlook are unchanged from February.

Its March forecast has rates in the first quarter of 2025 at 5.9%, also unchanged from their prediction from the prior month. But the fourth quarter 2025 average of 5.6% is slightly higher than what it called for in February.

The Freddie Mac March blog posting expects a modest recovery for the housing market in the second part of this year as rates drift down following an expected Federal Reserve rate cut that investors are now expecting for this summer.

"The recovery, however, will be limited as the rate lock effect will prevent homes from coming on the market," the Freddie Mac blog said. "We expect upward pressure on home prices to remain as more first-time home buyers continue to flood the housing market that is plagued by a lack of supply."

Freddie Mac no longer supplies detailed volume estimates with its economic commentary. However, the company said that using its "baseline scenario, we expect the dollar volume of purchase origination to improve modestly in 2024 and 2025.

"Despite firm price growth, our view on originations is subdued since a modest recovery in home sales coupled with a rising share of cash purchases will restrict purchase origination volumes from growing significantly," the blog post continued.

Refinance volume will be limited because many homeowners lack the incentive to act given where rates are now versus when they last took out a mortgage.

"Together, we expect total mortgage origination to remain low through most of 2024 but start to increase at the end of the year and see modest increases in 2025," Freddie Mac said. "While our outlook remains optimistic, caution is warranted considering the fight against stubborn inflation may drag on longer."

If credit quality were to deteriorate as some expect, that could also impact the forecast, but Freddie Mac added that its baseline forecast doesn't anticipate this sort of event taking place.