When Will Mortgage Rates Drop?

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For anyone that’s been watching the Maui housing market and considering when is the best time to buy or sell a home in Hawaii one of the biggest factors taken into consideration has been home mortgage interest rates. There’s been a lot of talk about whether rising rates would cause prices to drop, how high rates would go, how soon rates will drop, and how that will affect the real estate market. In this article we’ll dive into everything you need to know about the current and future mortgage rates.

Where We Were

For context, first we need to explain that when we talk about interest rates we are generally referring to what is called the Fed rate aka the Federal Reserve’s target interest rate. This is the rate that the Federal Reserve sets to influence markets and the economy. The Fed has one primary goal, and that is to keep inflation at what they consider to be a healthy level. According to the Fed, 2% annual inflation is the ideal level. If inflation gets too low or the economy is threatened by a recession the Fed will typically lower the Fed rate, which will indirectly cause mortgage rates to drop along with interest rates on other forms of borrowing, and this tends to stimulate the economy ultimately keeping inflation up. If inflation gets too high, like we’ve seen in the years since the pandemic, then the Fed will increase the Fed rate which will ultimately roll over into other forms of borrowing including mortgage rates.

FRED economic data chart showing the history of the average 30 year fixed rate mortgage in the U.S.
FRED economic data chart showing the history of the average 30 year fixed rate mortgage in the U.S. over the last 50 years

Over the last two decades interest rates have been the lowest ever recorded in history and they’ve stayed at historically low rates for an incredibly long time. In the chart above you can see the rates between 2000-2021 are lower than any other time recorded. Rates were particularly high in the late 1970s and early 1980s and that’s because inflation was out of control at that time, even worse than it’s been recently. This cause the Fed to increase interest rates severely, resulting in mortgage rates climbing sharply, and that’s why we hear folks from the baby boomer generation talk about their first home mortgage interest rates often being 12-15%. The key difference between then and now is that the average home price at that time was about $70,000 nationally, whereas today it is around $450,000. So if someone argues that today’s rates are still cheap and we shouldn’t complain about 7% mortgage rates, just remind them that a loan for 70k at 12% interest is much cheaper than 450k loan at 7% interest. Plus if we apply this principle to the Maui housing market it’s much more extreme, since the median home price on Maui today is well over $1 million.

Exterior of a condo unit in Iao Parkside that we sold in 2021 when the market was very hot
A condo at Iao Parkside in Wailuku that we sold in 2021 when interest rates were low

In 2022 the Fed started aggressively increasing the Fed rate which is why we saw home mortgage rates rise so sharply. In October 2023 the average mortgage rate for an owner occupant with a 30 year fixed loan issued was nearly 8%. Thankfully in the weeks since mortgage rates have come down quite a bit, and as of today the average is 6.67%. The primary reason rates have dropped by over 1% in just 2 months is because inflation has continued to cool down and the Fed announced that they expect to begin cutting rates in the coming months.

Where We Are Now

Currently as we approach the end of 2023 and the beginning of 2024, the Fed’s strategy appears to have worked. Inflation has steadily been decreasing and we are starting to approach the Fed’s target rate of 2% inflation. The current Fed rate is 5.25-5.5%, and mortgage rates have been running between the high 6’s to mid 7% range. It is widely believed that at the rate we are going, inflation should settle back down to the target rate of 2% in Q1-Q2 of 2024. If things go as planned and this happens, we are expecting the Fed to slowly begin lowering the Fed rate, which will almost certainly result in home mortgage rates lowering as well.

This is a screenshot of my own personal First Hawaiian Bank account showing the terms on one of the mortgages that I took out recently. As you can see, the interest rate is 6.375%, a low rate considering how much higher rates went in the 6 months since I took this loan out.
This is a screenshot of my own personal First Hawaiian Bank account showing the terms on one of the mortgages that I took out recently. As you can see, the interest rate is 6.375% which I’m actually very happy with, all things considered. I took this loan out in May 2023. Keep in mind that this is an investment loan, not a primary residence loan, so the rates are much higher. I also chose a 10 year fixed mortgage to get a better rate, but it becomes a variable rate after that. A 30 year fixed rate would have been around 7.5% at that time.

Don’t get too excited though! We are only expecting the Fed to lower rates by .25% at a time. We do, however, expect the Fed to implement 3 rate cuts in 2024. That means that 1 year from now the Fed rate could be .75% lower than it is today.

While we already said that the Fed rate is not equal to home mortgage rates, and is not directly tied to them, it certainly does effect them. No one knows what home mortgage rates will be if the Fed does lower their rate by .75%, but personally I would anticipate that it is not unrealistic to think that home mortgage rates could be in the 5-6% range one year from now if everything goes as planned.

Note: If you plan on buying a home today and refinancing withing a few years because you expect rates to drop, you might want to consider a 5, 7 or 10 year fixed rate that turns variable after the initial term. In the screenshot above of my loan with FHB, that’s what I chose to do because I personally do think that I will be able to refinance my loan for a lower interest rate before the 6.375% rate expires in 2033. But please due your own due diligence to make your own decision, as it’s very possible that I could be wrong about this. Investopedia can help you compare fixed vs. adjustable rate mortgages.

What Does This Mean For The Maui Real Estate Market?

So how will this affect home prices in Maui and the rest of the Hawaiian islands? The short answer is that no one knows. But I can share my personal projections based on my 15 years in the real estate industry.

I do think that lowering interest rates will cause home prices in Hawaii to hold steady, and likely even continue to increase. But I do not expect home prices to increase anywhere near as dramatically as they have recently. I think it’s realistic to expect home prices on Maui to increase by between 4-8% per year over the next couple of years, assuming we don’t experience some unforeseen catalyst that influences home values.

That being said, I personally believe there is one huge factor that is more important than mortgage rates. That factor is housing inventory, and inventory across the entire country is far below the levels needed. The reason for this is because when the financial crisis hit in 2008 construction of new homes fell off a cliff. We went from building around 2 million new homes per year to building only 500,000 new homes per year and while we have slowly resumed construction over the last 15 years, we still have not returned to building the number of homes we need in order to keep up with population growth. Currently we’re building about 1.3 million homes per year. We built more homes in almost every decade since we started keeping records, including the 1960s, 1970s, 1980s, and 1990s, even though our population was far less during those times.

FRED economic data chart showing historical "housing starts", or the number of new construction homes that were started each year.
FRED economic data chart showing historical “housing starts”, or the number of new construction homes that were started each year. This chart is important because it shows that we still have not made up the deficit that was created as a result of construction coming to a stop in 2008, so even if we started building 3 million homes a year right now, we would still have a shortage due to all the homes we didn’t build over the last 15 years.

How Will This Affect Maui Real Estate?

So interest rates absolutely play a key role in the movement of home prices in Hawaii and the rest of the country, but I believe that inventory is a bigger factor in today’s market. It all comes down to the most basic economic principles of supply and demand. Even though demand is significantly lower today than it was in 2021 when rates were at rock bottom, it’s still hard to get a home because there are around 50% less homes available for sale. This means that the market has slowed down since 2021, but not by as much as you might expect.

Going forward I believe that the lack of inventory and the shortage of construction of new homes will continue to shore up the market and support home and condo values on the island of Maui, Oahu, Kauai, and the Big Island of Hawaii.

Is It Time To Sell?

If you’ve decided now is the time for you to sell your home or condo on Maui, or anywhere in Hawaii, contact Maui Home Buyers for a quick cash offer. We’ll buy your property as-is, with no commissions or fees, and we can close on your timeline. We’re not the perfect solution for everyone, but it’s worth seeing what we can offer before you decide to sign a listing contract with a Realtor. If we’re not the best fit for your needs, we’ll happily help you find the best Realtor for your particular property. Call or text Maui Home Buyers 24/7 at: 808-359-3121

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