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Last year, the road to lower mortgage rates It seemed relatively simple: the official inflation will go down, the Federal Reserve Cut interest rates and the cost of borrowing will gradually decrease in 2025.
But now, housing market experts aren’t so sure.
“Mortgage rates will not come down as much as we had anticipated, and affordability will still be a challenge,” he said. Lisa Sturtevantchief economist of the real estate agency Bright MLS.
High mortgage rates aren’t the only reason why home ownership has become a challenge. As mortgage rates rise in 2022, house prices hit record is an inventory shortage persisted.
Although mortgage rates have fallen from their peaks of 8%, the decline has been slow and gradual. In the last 12 months, the average 30 year fixed rate mortgage it fluctuated between 6.5% and 7.5%. Most housing economists had expected mortgage rates to fall to 6% by the end of 2024, moving into the mid-5% range in 2025. But the rates of the ‘mortgage recently jumped to 7%.
Right now, forecasts show 30-year average fixed mortgage rates hovering around the mid-6% mark for a while. Logan Mohtahsamlead analyst at HousingWire, expects rates to range between 5.75% and 7.25% throughout the coming year.
Many economists say that President-elect Donald Trump proposed policieswhich include tax cuts and sweeping tariffs, could stimulate demand, increase deficits and cause inflation to cool down. That could prompt the Fed to delay future rate cuts, holding off higher financing rates for more.
Trump has promised that mortgage rates will return to their pandemic-era lows 3% under his administrationbut that is unlikely to happen. Mortgage rates are usually only that low during severe economic recessions. In fact, given the continued strength of the economy, the Federal Reserve is they plan fewer interest rate cuts next year
Even so, the Fed doesn’t set mortgage rates directly, and neither does the White House — lenders do. Mortgage interest rates are closely tied to the yield on the 10-year Treasury note, and bond market investors drive higher or lower yields based on what they believe will happen. in the future, not what is happening now.
“While there is uncertainty about the extent of the inflation impact of Trump’s policies, higher inflation expectations tend to lead to higher bond yields and mortgage rates,” he said. Beth Ann Bovinochief economist of the US Bank.
How much can mortgage rates change in a year?
Mortgage rates fluctuate daily, usually by a few basis points (one basis point is equivalent to 0.01%). The mortgage market is also prone to volatility. Over the course of a year, mortgage rates can change a lot or not much at all.
Historically speaking, the largest swings in mortgage rates have been accompanied by economic catastrophes (eg, rising inflation, the onset of a recessionetc.) that has driven bond yields significantly higher or lower over a sustained period of time.
In 2022, for example, mortgage rates have risen from about 3% to over 7% over the 10-month period due to rising inflation and the Fed’s aggressive rate hikes. That’s a difference of 4% in less than a year. Compare with 2024: The difference between this year’s peak (7.33%) and bottom (6.1%) is just over 1%.
Mortgage rates could move in a similarly tight range in 2025, especially if economic growth remains steady and future data does not give investors cause for concern.
But a new presidential administration, changes in the geopolitical outlook and the potential for inflation to rebound all have the power to move mortgage rates more than 1% in either direction, said Colin Roberston, founder of the housing market site. The Truth About Mortgages.
For example, in the worst-case scenario where the United States moves toward a recession and inflation falls well below target, mortgage rates could reach 4%, according to Matt Graham of Daily Mortgage News. “In the opposite scenario, where the economy is strong, inflation persists and national deficits increase, mortgage rates could go towards or above 8%,” Graham said.
What could cause mortgage rates to rise in 2025?
The same reason that mortgage rates have increased in 2022 is also what could cause the increase next year: inflation.
Inflation is a key measure of the health of the economy and influences the Fed’s decision to adjust interest rates. It also affects the bond market, where mortgage rates are determined. High inflation limits investor demand for long-term bonds, causing their prices to fall and mortgage rates to rise.
Trump’s proposals include a universal 20% fee on all imports with a possible tariff of 60% on imports from China. If implemented, these fees will be inflationary, since companies are likely to pass these costs on to consumers and increase prices. Tax cuts could also decrease tax revenues and increase national deficits, resulting in higher long-term bond yields.
The Fed has a target rate of 2% for annual inflation. If the official inflation rate moves much higher than that in 2025, the central bank is less likely to enact interest rate cuts, which could put upward pressure on interest rates. mortgage.
“At the most basic level, rates will always be influenced by the state of the economy and inflation,” Graham said.
What could cause the decrease in mortgage rates in 2025?
Lower mortgage rates next year are still possible, but a few conditions must be met first.
Assuming Trump’s policies do not outpace inflation in 2025, it would take significantly weaker economic conditions (including a declining labor market) and a decline in 10-year Treasury yields to open the door to the lower rates.
“If the unemployment rate rises or hiring slows considerably, then borrowing costs, including mortgage rates, could come down,” Sturtevant said. The Fed typically responds to economic downturns by cutting interest rates, and banks and lenders typically pass the rate cuts on to consumers in less expensive longer-term loans, including mortgages.
In that case, 30-year fixed mortgage rates could drop just below 6%, Mohtashami said. But it is unlikely that mortgage rates can move much lower than that, unless new economic policies result in a significantly lower government debt deficit.
What else affects the housing market in 2025?
Even if average mortgage rates are expected to drop by 1% in 2025, it will not make buying a home affordable for most Americans, especially low-income families low and medium.
Since 2020, house prices have increased more than 40%. And while home price growth has since slowed, it’s still growing 5.1% on an annual basis. Prices are expected to increase by just under 2% in 2025, he said Selma Heppchief economist at Core Logic.
Part of the reason home prices are so high is that the housing market is short about one to four million houses. In recent years, new home construction has been delayed due to rising construction costs and strict zoning regulations. When home buying demand exceeds supply, prices rise.
This also applies to existing home inventory. As most current owners have interest rates below 5%they are less inclined to sell as it would mean buying a new home at a higher rate. Both the “rate-lock” effect and the lack of new housing construction have effectively frozen the housing market.
While experts expect the housing stock to improve in 2025, it will take years to make up for lost ground.
Should you wait or buy a home in 2025?
If you are one of the millions of homeowners waiting for rates to dropKnow that the macroeconomic issues affecting the housing market today are beyond your control. Only you can determine if he is financially ready to buy a house and manage all his expenses.
“In 2025, I will not focus on mortgage rates,” he said Jeb Smithlicensed real estate agent and member of CNET Money’s expert review board. Smith recommends prioritizing things that can lower your individual mortgage rate, such as saving for a larger advance and strengthen yours credit score.
Instead of trying to time the real estate market, Smith said to focus on the factors you can actually control.
