In late 2023, just before the calendar turned, the financial markets were pricing in six Federal Reserve rate cuts in 2024. After all, inflation had cooled and the Fed appeared to be gearing up to land the plane. For a few weeks, mortgage loan officers told HousingWire reporters that they were quoting some prospective borrowers in the high 5%, low 6% range and maybe, just maybe, this would end up being a pretty good year.
The good times didn’t last long. The labor market has remained remarkably resilient and inflation has been far harder to tame than was anticipated. Mortgage rates quickly shot back up to 7% and have largely remained there this year. As recently as April, the financial markets had reversed course and were planning on just one rate cut. Now the expectation from the markets is just two cuts this year.
The Mortgage Bankers Association‘s Chief Economist Mike Fratantoni and Bank of America‘s head of MBS strategy Jeana Curro this week shared their forecasts for 2024 at MBA Secondary and Capital Markets conference. Let’s take a look at some key projections.
Curro said Bank of America is forecasting the 10-year Treasury to hit 4.25, which would yield about $1.6 trillion in origination volume in 2024, about 85% of which would be purchase mortgages.
“Mortgage rates and MBS spreads have retreated from the October 2023 peaks but are still wide to historic levels,” she told attendees at MBA Secondary.
BofA economists are forecasting one rate cut in 2024, in December, followed by four cuts in 2025 and another two in 2026.
“Why do we think spreads will tighten and rates will go down? Key things are rates, volatility and macro policy,” Curro said. “At a high level, a lot of these ever-changing expectations for the Fed have created volatility. Lower rates, lower volatility, tighter spreads correlates historically.”
BofA is forecasting mortgage rates to finish 2024 around 6.5%, down from the current 7.0%. BofA economists think the Fed has finished hiking for this cycle and that quantitative tightening will end by the end of 2024. Curro noted that the tapering runoff has already begun, with the $60 billion Treasury cap dropping to $25 billion effective in June and the $35 billion in monthly MBS caps to remain intact.
Regarding the MBA market, Curro said money managers will be the primary source of demand in 2024, followed by overseas investors. Inflows into money managers in the first quarter have been strong; they’re about 5.7% overweight, Curro said. Cash on the sidelines will come in when spreads are attractive. She also noted that there is strong interest from non-traditional overseas players, including the U.K., Canada, Ireland and Saudi Arabia.
The MBA’s Fratantoni projects mortgage rates to finish 2024 at 6.5%, up from its previous forecast of 6.1%. Similar to Bank of America’s forecasters, Fratantoni expects an uptick in origination volume in 2024. The MBA expects $1.8 trillion in origination volume in 2024 and then a major rebound in the following two years. Fratantoni expects $2.0 trillion in origination volume in 2025 and $2.28 trillion in 2026. Mortgage rates should fall to 5.9% in 2025 and 5.7% in 2026, according to Fratantoni’s forecast.
Fratantoni noted that loan application data shows relatively low levels of demand, a consequence of persistently high interest rates.
With the lock-in effect still prevalent, new home sales will remain a significant contributor to supply. Builders are now roughly one-third of the market, and they’ve begun pivoting toward smaller, lower-priced homes. New home sales will increase 11% this year, per BofA’s forecast.
In his presentation, Fratantoni is forecasting 1.40 million housing starts in 2024, a slight decline from 1.42 million last year. He sees 1.44 million coming in 2025 and 1.45 million in 2026. The MBA’s chief economist also expects 4.30 million total existing home sales in 2024, up from 4.09 million in 2023. Conditions will support 4.54 million home sales in 2025 and 4.82 million in 2026, his forecast shows.
Fratantoni’s forecast calls for 735,000 new home sales in 2025, up from 667,000 in 2023. The builders will continue to see increased volume, up to 813,000 in 2025 and 817,000 in 2026, his forecast shows.
The game, Fratantoni said, is serving the first-time homebuyer segment over the next few years. He noted that builders were well positioned and pointed out that the share of FHA is north of 25% in the new home market, even though it’s been flat in the broader market. “It’s a response to the challenges with affordability.”
Correction: An earlier version of this story incorrectly stated BofA forecasted one hike in 2024; they have forecasted one cut.
