JANUARY 6, 2025
New year, new housing market? Not exactly.
In early 2025, affordability remains a major challenge for prospective homebuyers, with rates and listing prices proving to be sticky, said Joel Berner, senior economist at Realtor.com.
The average rate for a 30-year fixed mortgage kicked off 2025 near 7%, just above where it was last January.
“Several key factors can cause mortgage rates to rise or fall,” said Valerie Saunders, chief executive strategist at the National Association of Mortgage Brokers. The mortgage market is deeply impacted by inflation, Federal Reserve policies, bond prices, GDP growth and employment figures, to name a few.
Based on current economic conditions, a significant drop in mortgage rates before the spring home-buying season is unlikely, according to Saunders.
Moreover, given recent strong economic data and speculation that President-elect Donald Trump’s tax, immigration and tariff proposals will reignite inflation, the Fed is projecting a far slower pace of interest rate cuts by the agency in 2025.
With so much uncertainty, the only sure thing is that mortgage rate forecasts always change. “Buyers shouldn’t worry about timing the mortgage rate market, and instead should focus on finding a home that meets their budget and making as big of a down payment as possible,” said Berner.
Where will mortgage rates go in 2025?
Aside from typical day-to-day fluctuations, mortgage rates are expected to stay above 6.5% for the next few months. If inflation continues to cool and the Fed is able to carry out its projected two 0.25% cuts, mortgage rates could inch down closer to 6.25% later in the year.
Today’s rates seem high compared with the recent 2% rates of the pandemic era. But experts say getting below 3% on a 30-year fixed mortgage is unlikely without a severe economic downturn. Since the 1970s, the average rate for a 30-year fixed mortgage has been around 7%.
Only a sudden economic shock, such as the onset of a recession or spike in oil prices, could cause mortgage rates to plunge, said Keith Gumbinger, vice president of mortgage site HSH.com. “Drastic changes in direction are usually the result of some emerging significant event somewhere that upends financial markets.”
What will affect mortgage rates in the near term?
The biggest wild card for mortgage rates is the new administration’s economic policies. Trump’s proposals for tax cuts and tariffs could stimulate demand, increase deficits and cause inflation to soar again. Mortgage rates are highly sensitive to inflation.
“Tax cuts, tariffs and mass deportations are all inflationary measures that would indirectly pull mortgage rates up while directly pushing up the cost of home construction and purchase,” said Berner. If these policies are implemented quicker than markets expect, it could result in an equally fast surge in mortgage rates, Berner said.
Higher inflation would also prompt the Fed to delay future rate reductions. Though the Fed influences the direction of overall borrowing rates, it doesn’t directly control the mortgage market.
Still, investors care about the Fed’s future outlook for rate adjustments because it determines their trading strategy and risk assessment. That’s why market forces often move in anticipation of the Fed’s policy moves.
Average 30-year fixed mortgage rates closely track bond yields, specifically 10-year Treasury yields. If the expectation is for unemployment to increase, bond yields and mortgage rates will fall. But if the outcome doesn’t match market expectations, yields can quickly swing higher or lower.
Mortgage rates are also impacted by geopolitical events, including military conflicts and elections. Political instability can lead to economic uncertainty, which can result in more volatility with bond yields and mortgage rates.
Bond market investors would have to be convinced that the economy is cooling for mortgage rates to reverse course. That’s why, absent a fresh downshift in the inflation trend or a sudden weakening of labor conditions, mortgage rates will remain close to 7% for a while, said Gumbinger.
What is impacting the housing market in 2025?
Today’s unaffordable housing market results from high mortgage rates, a long-standing housing shortage, expensive home prices and a loss of purchasing power due to inflation.
🏠 Low housing inventory: A balanced housing market typically has five to six months of supply. Most markets today average around half that amount. According to Freddie Mac, we still have a shortage of around 3.7 million homes.
🏠 Elevated mortgage rates: In early 2022, mortgage rates hit historic lows of around 3%. As inflation surged and the Fed hiked interest rates to tame it, mortgage rates more than doubled. In 2025, mortgage rates are still high, pricing millions of prospective buyers out of the housing market.
🏠 Rate-lock effect: Since the majority of homeowners are locked into mortgage rates below 5%, they’re reluctant to give up their low mortgage rates and have little incentive to list their homes for sale, leaving a dearth of resale inventory.
🏠 High home prices: Although home buying demand has been limited in recent years, home prices remain high because of a lack of inventory. The median US home price was $429,963 in November, up 5.4% on an annual basis, according to Redfin.
🏠 Steep inflation: Inflation means an increase in the cost of basic goods and services, reducing purchasing power. It also impacts mortgage rates: When inflation is high, lenders typically raise interest rates on consumer loans to ensure a profit.
Is it better to wait or buy?
It’s never a good idea to rush into buying a home without knowing what you can afford, so establish a clear home-buying budget. Here’s what experts recommend before purchasing a home:
💰 Build your credit score. Your credit score will help determine whether you qualify for a mortgage and at what interest rate. A credit score of 740 or higher will help you qualify for a lower rate.
💰 Save for a bigger down payment. A larger down payment allows you to take out a smaller mortgage and get a lower interest rate from your lender. If you can afford it, a down payment of at least 20% will also eliminate private mortgage insurance.
💰 Shop for mortgage lenders. Comparing loan offers from multiple mortgage lenders can help you negotiate a better rate. Experts recommend getting at least two to three loan estimates from different lenders.
💰 Consider renting. Choosing to rent or buy a home isn’t just comparing monthly rent to a mortgage payment. Renting offers flexibility and lower upfront costs, but buying allows you to build wealth and have more control over your housing costs.
💰 Consider mortgage points. You can get a lower mortgage rate by buying mortgage points, with each point costing 1% of the total loan amount. One mortgage point equals a 0.25% decrease in your mortgage rate.
Courtesy/Source: CNET
