2025 mortgage rate forecast: Here’s why you shouldn’t bet on lower rates this year

Last year the road to lower mortgage rates it seemed relatively easy: official inflation would fall Federal Reserve will lower interest rates and the cost of borrowing will gradually decrease in 2025.

But now housing experts aren’t so sure.

“Mortgage rates will not fall as much as we expected and affordability will still be a challenge,” said Lisa SturtevantChief Economist at Bright MLS Real Estate Agency.

High mortgage interest rates aren’t the only reason home ownership has become a challenge. As mortgage rates soar in 2022, housing prices reached record values ​​and an inventory shortage stubborn

Although mortgage rates have fallen from their highs of 8%, the decline has been slow and gradual. Over the past 12 months, the average 30-year fixed rate mortgage fluctuates between 6.5% and 7.5%. Most housing economists expected mortgage rates to fall to 6% by the end of 2024, moving into the mid-5% range in 2025. But recently, mortgage rates have jumped back up to 7%.

Forecasts now show average 30-year fixed mortgage rates hovering around the mid-6% range for some time. Logan Mohtasamlead analyst at HousingWire, expects rates to range between 5.75% and 7.25% next year.

Many economists say that President-elect Donald Trump proposed policieswhich include tax cuts and big tariffs, could boost demand, widen deficits and cause inflation to heat up again. This could lead the Fed to delay future interest rate cuts, keeping interest rates higher for a longer time.

Trump has promised mortgage rates will return to pandemic-era lows of around 3% under his managementbut that is unlikely to happen. Mortgage rates typically only fall this low during severe economic downturns. Indeed, given the continued strength of the economy, the Federal Reserve is forecast fewer interest rate cuts next year.

However, 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 think 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 generally lead to higher bond and mortgage yields,” said Beth Ann Bovinochief economist at US Bank.

How much can mortgage interest rates change in a year?

Mortgage rates vary daily, usually by only 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 at all.

Historically, the largest swings in mortgage interest rates have been accompanied by economic catastrophes (eg, rising inflation, the onset of recessionetc.) resulting in significantly higher or lower bond yields over an extended period of time.

In 2022 for example, mortgage rates increased from about 3% to over 7% within 10 months due to rising inflation and aggressive rate hikes by the Fed. That’s a 4% difference in less than a year. Compare that to 2024: The difference between this year’s high (7.33%) and low (6.1%) is just over 1%.

Mortgage rates may move in a similarly tight range in 2025, especially if economic growth remains robust and future data does not cause investors to worry.

But the new presidential administration, changes in the geopolitical outlook and the potential to reignite inflation have the power to push mortgage rates up more than 1% in either direction, said Colin Roberston, founder of the housing market site The truth about the mortgage.

For example, in the severe scenario where the U.S. moves into recession and inflation falls well below target, mortgage rates could reach the 4% range, according to Matt Graham on Mortgage News Daily. “In the reverse scenario, when the economy is strong, inflation persists and national deficits widen, mortgage rates could reach or exceed 8 percent,” Graham said.

What could cause mortgage rates to rise in 2025?

The same reason mortgage rates jumped in 2022 is also what could push them higher 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 set. High inflation limits investor demand for longer-term bonds, causing bond prices to fall and mortgage rates to rise.

Trump’s proposals include a universal 20% tariff on all imports with a possible tariff of 60% on imports from China. If implemented, these tariffs would be inflationary as businesses are likely to pass these costs on to consumers and raise prices. Tax cuts can also reduce fiscal revenue and increase the national deficit, leading to 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 introduce rate cuts, which could put upward pressure on mortgage rates.

“At the most basic level, interest rates will always be affected by the state of the economy and inflation,” Graham said.

What could drive down 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 boost inflation in 2025, it would take significantly weaker economic conditions (including a shrinking labor market) and a decline in 10-year Treasury yields to open the door to more low interest rates.

“If the unemployment rate rises or hiring slows significantly, then borrowing costs, including mortgage rates, may decline,” Sturtevant said. The Fed 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 percent, Mohtashami said. But mortgage rates are unlikely to fall much lower than that unless new economic policies lead to a significantly lower government debt deficit.

What else affects the housing market in 2025?

Even if average mortgage rates fall by 1% in 2025, that will not make home ownership affordable for most Americans, especially low- and moderate-income households.

From 2020 housing prices have increased by over 40%. And while house price growth has since slowed, it’s still up 5.1% on an annual basis. Prices are expected to increase by just under 2% in 2025, they said Selma Heppchief economist at Core Logic.

Part of the reason home prices are so high is because the housing market is short approximately one to four million houses. New home construction has lagged in the past few years 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 an interest rates below 5%they are less likely to sell as it would mean buying a new home at a higher price. Both the “price lock-in effect” and the lack of new housing construction effectively froze the housing market.

Although experts expect housing inventory to improve in 2025, it will take years to catch up.

Wait or buy a home in 2025?

If you are one of the millions of prospective homeowners in anticipation of falling interest ratesknow that the macroeconomic issues plaguing the housing market today are beyond your control. Only you can determine if you are financially ready to purchase a home and take on all of its costs.

“In 2025 I wouldn’t focus on mortgage rates,” said Jeb Smithlicensed real estate agent and member of CNET Money’s expert panel. Smith recommends prioritizing things that can lower your individual mortgage rate, such as saving for a larger down payment and strengthening your credit rating.

Instead of trying to time the real estate market, Smith said to focus on the factors you can actually control.

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