Will 2025 be the 12 months mortgage rates finally go — and stay — down?
In accordance with most housing market analysts, anxious homebuyers waiting for improved affordability will likely get a respite in the brand new 12 months. But while mortgage rates are expected to diminish, anyone expecting a large drop is more likely to be disenchanted.
All major industry players, including the National Association of Realtors, Zillow, Realtor.com and Redfin, agree that mortgage rates should move lower next 12 months. Just how much lower is up for debate. NAR and Realtor.com expect rates to average between 6.2% and 6.4% by the top of 2025. Zillow believes rates will stay inside a good range between 6.5% and seven%, and Redfin anticipates rates will average 6.8%.
Mortgage rate decreases will likely be slow and bumpy in a repeat of this 12 months’s rate movement. In 2024, Freddie Mac’s benchmark rate for a 30-year fixed-rate loan increased to 7.22% in May and dropped to a low of 6.08% in September before heading higher again. Current rates are hovering near 7%. This see-saw pattern will probably proceed next 12 months.
Alas, for prospective buyers hoping for greater affordability, a gradual improvement in mortgage rates may very well be frustrating. It’s obvious that the high cost of financing has put a damper on the housing market over the past two years: In a recent survey by online real estate company Opendoor, greater than 50% of respondents cited mortgage rates as the largest obstacle to housing affordability heading into next 12 months.
Lower mortgage rates can increase a homebuyer’s ability to finance a house purchase. In truth, record-low mortgage rates through the early pandemic years created a boom: Buyers could afford larger and higher-priced homes since the mortgage payments were so inexpensive.
In accordance with NAR data, the typical monthly mortgage payment for May 2021, for instance, was $1,067 on a $400,000 home (assuming a 20% down payment). At a 6.69% rate, the payment on that very same loan could be $2,063.
What’s going to influence mortgage rates in 2025?
Scott Bridges, chief consumer direct lending production officer at mortgage lender Pennymac, points out that it’s difficult to predict mortgage rate movement. Even under one of the best circumstances, he says, many forecasts “end up improper.”
Trying to 2025, the incoming presidential administration is about to implement recent policies that may affect the U.S. economy and housing, making it especially “hard to predict what’s going to occur,” says Bridges.
Trying to find clues? Many prospective buyers may concentrate on the Federal Reserve and whether it cuts short-term rates of interest this month (and into the brand new 12 months) as the first factor influencing mortgage rates moving forward. But the truth is that the central bank’s decisions have no direct impact on long-term rates of interest like mortgage rates.
As a substitute, says Leo Pareja, CEO of eXp Realty, the speed for a 30-year home loan is more closely tied to the movement of the 10-year Treasury note than the actions of the Fed. Treasuries, in turn, are directly influenced by current economic conditions.
Treasuries are debt instruments the federal government sells to investors to finance its debt. When the U.S. economy is powerful, similar to when inflation is low and employment is high, investors typically prefer to speculate within the stock market because returns are higher. To draw buyers during these times, the federal government has to extend the yields offered on Treasuries. Because home loans are typically held for 10 years, their rates are tied to the 10-year yields: If yields rise, so do mortgage rates.
While domestic economic aspects will play a major role in rate movement, some outliers could also derail their path.
Pareja points to the war between Russia and Ukraine and the recent unrest within the Middle East as aspects that “could affect consumer sentiment, in addition to the correlation between the 10-year Treasury and the actual 30-year fixed rate.” Global conflicts expanding to a bigger area could, for instance, impact the provision of essential commodities like grain and oil, resulting in higher inflation and eventually higher rates of interest, including those on home loans.
In other words, the present outlook for 2025 is comparatively positive — but could turn bleak at any moment.
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