At the beginning of 2024, the road to lower mortgage rates seemed relatively clear: official inflation would decline, Federal Reserve will make more interest rate cuts and the cost of borrowing will gradually decrease in 2025.
That was then.
Now, housing market experts aren't so sure. “Mortgage rates will not come down as much as we expected and affordability will still be a challenge,” he said Lisa SturtevantChief Economist at Bright MLS Real Estate Agency.
Rising mortgage rates aren't the only reason homeownership has become largely unaffordable. As mortgage rates rise in 2022, home prices reached record and an lack of supplies persisted.
Although mortgage rates have fallen from peaks in 2023, the decline has been slow and gradual. Over the past 12 months, the average 30 Year Fixed Rate Mortgage it fluctuates between 6.5% and 7.5%. Most housing economists expected mortgage rates to drop to 6% by the end of 2024, moving to the mid-5% range in 2025. But mortgage rates recently jumped to 7%.
Now, forecasts show average 30-year fixed mortgage rates hovering around the mid-6% mark for some time. Logan Mohtahsamlead analyst at HousingWire, expects rates to range between 5.75% and 7.25% over the next year.
Many economists say that the newly elected President Donald Trump proposed policieswhich include tax cuts and massive tariffs, could stimulate demand, increase deficits and cause inflation to heat up. That could encourage the Fed to delay a future rate cut, keeping it on hold financing rates higher for longer.
Trump has promised that mortgage rates will return to their lowest since the pandemic era 3% under his managementbut that is unlikely to happen. Mortgage rates typically fall this low during severe economic downturns. In fact, given the current strength of the economy, the Federal Reserve is projecting 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 rates are closely tied to the 10-year Treasury yield, and investors in the bond market raise 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 inflationary impact of Trump's policies, higher inflation expectations tend to lead to higher bond yields and mortgage rates,” he said. Beth Ann Bovinochief economist at US Bank.
How much can mortgage rates change in a year?
Mortgage rates fluctuate daily, usually by only a few basis points (one basis point is equivalent to 0.01%). And the mortgage market is prone to volatility. Over the course of a year, mortgage rates can change a lot or not at all.
Historically, the biggest changes in mortgage rates have been accompanied by economic disasters (eg, rising inflation, the onset of recessionetc.) that drove bond yields significantly higher or lower over a longer period of time.
In 2022, for example, mortgage rates rose from around 3% to over 7% within 10 months due to rising inflation and aggressive Fed rate hikes. That's a 4% difference in less than a year. Compare that to 2024: The difference between this year's peak (7.33%) and trough (6.1%) is just over 1%.
Mortgage rates may 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 reignite 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 the mortgage.
For example, in the dire scenario where the U.S. heads into recession and inflation falls well below target, mortgage rates could reach the 4% range, according to Matt Graham of mortgage news daily. “In the opposite scenario, where the economy is strong, inflation persists and national deficits are rising, mortgage rates could move toward or above 8 percent,” Graham said.
What would cause mortgage rates to rise in 2025?
The same reason mortgage rates went up in 2022 is what could cause them to go up next year: inflation.
Inflation is a key measure of the health of the economy and affects the Fed's decision to adjust interest rates. It also affects the bond market, where mortgage rates are set. High inflation reduces investor demand for long-term bonds, causing their prices to fall and mortgage rates to rise.
Trump's proposals include universal 20% tariff on all imports with a possible 60% tariff on imports from China. If implemented, these tariffs would be inflationary, as businesses would likely pass those costs on to consumers and raise prices. Tax cuts may also reduce fiscal 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 it did in 2025, the central bank is less likely to cut interest rates, which could put upward pressure on mortgage rates.
“At the most basic level, rates will always be affected by the state of the economy and inflation,” Graham said.
What would cause mortgage rates to fall in 2025?
Lower mortgage rates are still possible next year, but a few conditions must be met first.
Assuming Trump's policies do not add to 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 lower rates.
“If the unemployment rate rises or hiring slows significantly, then borrowing costs, including mortgage rates, could fall,” Sturtevan said. The Federal Reserve typically responds to economic downturns by cutting interest rates, and banks and lenders typically pass on rate cuts to consumers in cheaper long-term loans, including mortgages.
In that case, 30-year fixed mortgage rates could fall 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 other factors are influencing the housing market in 2025?
Even if average mortgage rates decline by 1% in 2025, that will not make home ownership affordable for most Americans, especially low- and middle-income households.
Since 2020, home prices have increased by more than 40%. And while home price growth has since slowed, it's still on the rise 5.1% on an annual basis. Prices are expected to rise 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 approximately one to four million houses. Over the past few years, new home construction has lagged due to rising construction costs and strict zoning regulations. When demand for home purchases exceeds supply, prices rise.
That applies to existing home inventory, too. As most current owners have an interest rates below 5%they are less inclined to sell because it would mean buying a new home at a higher price. Both the “rate lock effect” and the lack of new housing construction have effectively frozen the housing market.
While experts expect housing inventory to improve in 2025, it will take years to make up lost ground.
Should you wait or buy in 2025?
If you are one of the millions of potential homeowners waiting for rates to dropknow that the macroeconomic issues plaguing the housing market today are beyond your control. Only you can determine if you are financially ready to buy a home and handle all of its costs.
“In 2025, I wouldn't 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 higher advance payment and strengthening your credit score.
Instead of trying to gauge the real estate market, Smith said to focus on the factors you can actually control.