Interest Rate Forecast 2023-2024: Predictions, Trends, and Influential Factors

Get a comprehensive understanding of the 2023-2024 interest rate forecast and the factors at play. While the recent US credit downgrade and shifts in bank ratings make headlines, our focus is on what these developments mean for future interest rates. We'll dissect the connections between credit scores, market sentiments, and economic indicators that shape these rates. Expert insights will uncover potential effects on mortgage rates and the broader real estate market. Come along as we navigate the evolving interest rate landscape in the months and beyond.

Fitch Downgrades US Credit Rating

A recent factor playing a significant role in current interest rates is the recent downgrade by Fitch Credit Ratings on the credit rating of the US Treasury Department of the US government. We were previously ranked as the safest investment in the world at AAA. Treasury bonds have functioned as the gold standard for the global market, as everything else is measured against their return – they are widely considered the safest investment globally. Well, that safest investment has now been downgraded from AAA down to AA+. This doesn’t seem like much of a downgrade, but when you're considered the gold standard and that standard is no longer at 100%, it raises concerns not just for the US but for the overall market as well. This downgrade is affecting interest rates and influencing various mortgages, including 50-year and 30-year mortgages.

The rationale behind this is that if the credit of the US comes under a bit of scrutiny, then the cost to borrow, not just for the nation but also for individual borrowers within the US, is likely to see a continued increase. This is due to the fact that the 30-year mortgage is typically tied to the ten-year treasury. If the ten-year Treasury rate goes up, then so do 15-year and 30-year mortgages. This is something that's impacting rates not only here in the short term, but I think this is actually going to be a longer-term impact on rates for the foreseeable future until that credit rating goes back up to AAA, if in fact it ever does. With this recent downgrade by Fitch, it has increased the 30-year mortgage rate from the high 6’s to the low to mid 7% range.

Cuts on Bank Ratings & Downgrade Watch

Speaking of downgrades, Moody's has recently taken the step of downgrading ten regional banks and has issued notices to several major banks, indicating that they're under scrutiny for potential downgrades. To me, this is a clear signal to investors that future downgrades are likely in store. A lot of regional and big national banks are in trouble right now because of their exposure to risks associated with the struggling and declining commercial real estate market as well as their ties to Treasury bonds.

Treasury bonds are typically the safest investment. Banks loaded up on ultra-low Treasury bond rates and now that rates have gone up, banks are trying to liquidate many of those Treasury bonds but the value in them has dropped. Banks are basically getting hit in both directions from both Treasury bonds and the commercial real estate side.

The reason this is important is it's obviously going to affect lending on commercial real estate, but it could absolutely spill over to the residential sector as well. This is primarily due to the diminished liquidity and reduced cash reserves within these banks. Consequently, there's a potential for an impact on the residential real estate market, particularly concerning products closely tied to banks themselves—like those they offer directly within their institution—and other portfolio-oriented products, which they retain rather than selling openly on the market. This is a factor that we need to keep an eye on long-term because it's going to absolutely affect short-term interest rates and could affect us for the mid-term until we get through this banking crisis and commercial real estate crisis.

What Investors Are Doing

Anytime we're making a prediction or wanting to know where the market is headed in terms of valuation or interest rates, it's always a good idea to look at what the smart money is doing. The Wall Street Journal recently ran an article basically looking at what informed investors are doing, and they drew the conclusion that investors are predicting that interest rates are going to be higher for a prolonged period of time. They came to this conclusion by looking at the ten-year Treasury market.

Basically, the ten-year Treasury market is a forward look at what investors think interest rates are going to do long term. The ten-year Treasury rate is actually at a ten-year high now so investors are now predicting that those rates are going to be higher for a prolonged period of time. The two-year Treasury rates are actually starting to decline. All of that packaged together basically points towards the smart money predicting that interest rates are going to stay higher for a prolonged period of time. Now, let's connect this with the 30-year mortgage rate. The 30-year mortgage rate is not actually tied to the Fed overnight rate, it's typically more tied to the ten-year Treasury rate.

Inflation’s Effect on Interest Rates

Another factor that I think points towards interest rates staying longer for a period of time is our Consumer Price Index data. One might argue, "Hey, the CPI data has come in at 3%, down from 9.6% just a year ago. Now it's at 3%, aiming to be at 2%. What's 1% among friends, right?" But the thing is, the Fed doesn't just want to hit 2%, they want to stay at that number for a prolonged period of time. They don't want to just hit it and bounce right back up.

The challenge here is, I'm not sure if the Fed is aware of this – though the real estate industry certainly is. I trust the Fed is also examining this data. The thing is, the last time we saw mortgage rates in the 5.5% range, our country experienced a significant surge in multiple offers for homes and homes being bid up in terms of value. So the next time we get to 5.5%, with all of that demand that's sitting on the sideline, I think that demand is going to come off of the sideline and go back into the residential real estate market. With that surplus of demand, if we hit 5.5%, I think we'll see double-digit appreciation in terms of real estate in terms of home values.

If home values were to appreciate by double digits, it could affect CPI data, prompting the Fed to resume raising overnight rates. This could potentially result in significant inflation. Given the current CPI at 3% and the Fed's desire to maintain a 2% target over the long term, it's likely that we'll remain at this figure for quite some time. This approach aims to prevent a sudden and substantial spike that the Fed wishes to avoid.

Interest Rate Predictions for 2023-2024

I think interest rates will start to stabilize between now and the end of the year, especially in the December timeframe when demand is a little bit lower. I think we'll see that high 6% range return and I think we'll stay there for a period of time.

I do think the Fed is going to pause its interest rate hikes in 2024. Now if they don't, I think this prediction goes out the window. But if they do pause their interest rate hikes, I think that's going to take a lot of the fear and uncertainty out of the 30-year mortgage rate which I think will transition from the high 6% range to a lower range around 6%. I think we'll stay there for a period of time, it could be 12 months to 18 months. I think it could even be a couple of years as the Fed tries to get CPI inflation data down from 3% to 2% and keep it there for a period of time.

Looking at the near future, my expectation is that by year-end, we'll experience rates in the high 6% range. Moving forward to the next year, I foresee rates settling within the low 6% range. Depending on economic indicators, the severity of a potential recession, or global events, and in conjunction with the Fed's actions in reducing the target rate—where we might see quarter-point or half-point rate decreases—I ultimately believe we'll witness the return of 5.5% rates. Once that happens, we can expect a surplus of demand from those currently sitting on the sidelines.

Zillow recently conducted a poll, revealing that 25% of sellers are contemplating selling their homes within the next 24 months. This suggests a significant potential supply. As this supply becomes active, aided by lower rates, and with demand surging from first-time homebuyers and move-up buyers, I anticipate that when we reach the 5.5% mark, we will witness a resurgence of double-digit appreciation. This upswing won't be limited solely to the Huntsville market but will likely extend across the entirety of the United States.

Posted by Matt Curtis on


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