At the beginning of 2024, the road leads to lower mortgage rates seems quite clear: The official inflation will go down, the Federal Reserve will make further cuts in interest and borrowing costs will gradually ease through 2025.

That was it.

Now, housing market experts aren’t so sure. “Mortgage rates are not going as low as we expected, and affordability is still a challenge,” said Lisa Sturtevantchief economist at real estate agency Bright MLS.

High mortgage rates aren’t the only reason why home ownership has become out of reach. As mortgage rates rise in 2022, house price hit record highs and an inventory shortage continues.

Although mortgage rates have fallen from 2023 peaks, the decline has been slow and gradual. In the last 12 months, the average 30 year fixed mortgage rate fluctuates between 6.5% and 7.5%. Most housing economists expect mortgage rates to drop to 6% by the end of 2024, moving into the mid-5% range by 2025. But mortgage rates recently jumped back to 7%.

Today, forecasts show average 30-year fixed mortgage rates hovering in the mid-6% range for a while. Logan Mohtahsamlead analyst at HousingWire, expects rates to be between 5.75% and 7.25% throughout the year.

Many economists say President Donald Trump’s pick proposed policieswhich includes tax cuts and sweeping tariffs, could stimulate demand, increase deficits and reignite inflation. That could prompt the Fed to delay future rate cuts, further financing rates are higher for higher.

Trump has promised that mortgage rates will return to their pandemic-era lows 3% under his administrationbut that probably won’t happen. Mortgage rates usually only drop during severe economic downturns. Indeed, given the continued strength of the economy, the Federal Reserve is projects smaller interest rate cuts next year.

However, the Fed does not set mortgage rates directly, and neither does the White House – lenders. Mortgage interest rates are tightly tied to the 10-year Treasury bond yield, and investors in the bond market drive yields higher or lower based on what they believe will happen in the future, not what will happen. what happened today.

“While there is uncertainty about the extent of the inflationary impact of Trump’s policies, higher inflation expectations are likely to lead to higher bond yields and mortgage rates,” Trump said. Beth Ann Bovinochief economist at US Bank.

How much can mortgage rates change in a year?

Mortgage rates fluctuate daily, usually by just a few basis points (one basis point equals 0.01%). The mortgage market is also prone to volatility. Over the course of a year, mortgage rates can fluctuate more or less.

Historically, the biggest changes in mortgage rates have been accompanied by economic disasters (eg, soaring inflation, the onset of a eCONOMYetc.) that drive bond yields higher or lower for a sustained period of time.

In 2022, for example, mortgage rates rose from 3% to more than 7% within 10 months due to rising inflation and the Fed’s aggressive 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 bottom (6.1%) is just over 1%.

Mortgage rates may move in the same narrow range in 2025, especially if economic growth remains steady and future data does not give investors cause for concern.

But a new presidential administration, changing geopolitical outlook and the potential for inflation to change everything have the power to move mortgage rates by more than 1% anywhere. direction, said Colin Roberston, the founder of the housing market site. The Truth About Mortgages.

For example, in the worst-case scenario where the US moves toward a recession and inflation falls below target, mortgage rates could reach the 4% range, according to Matt Graham in Mortgage News Daily. “In the opposite scenario, where the economy is strong, inflation continues and the national deficit increases, mortgage rates could move to or above 8%,” said Graham.

What will cause mortgage rates to rise in 2025?

The same factor that caused mortgage rates to rise in 2022 is also likely to cause an increase next year: inflation.

Inflation is a key measure of economic health and influences the Fed’s decision to adjust interest rates. It also affects the bond market, where mortgage rates are determined. High inflation suppresses investor demand for longer-term bonds, causing their prices to fall and mortgage rates to rise.

Trump’s proposals include a 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 tend to pass the costs on to consumers and raise prices. Tax cuts can also reduce fiscal revenue and increase national deficits, resulting in higher bond yields.

The Fed has a 2% target rate for annual inflation. If the official inflation rate moves higher than in 2025, the central bank will be less likely to make interest rate cuts, which could increase pressure on mortgage rates.

“At the most basic level, rates are always going to be influenced by the state of the economy and inflation,” Graham said.

What will cause mortgage rates to drop in 2025?

Lower mortgage rates next year are still possible, but some conditions must be met first.

Assuming Trump’s policies don’t supercharge inflation by 2025, it would require much weaker economic conditions (including a shrinking labor market) and a drop in the 10-year yield. of the Treasury to open the door to lower rates.

“If the unemployment rate rises or hiring slows, then borrowing costs, including mortgage rates, can fall,” Sturtevant said. The Fed typically responds to economic downturns by cutting interest rates, and banks and lenders typically pass on rate cuts to consumers on less expensive longer-term loans, including debt.

In that case, 30-year fixed mortgage rates could fall below 6%, Mohtashami said. But it’s unlikely that mortgage rates will move lower than that unless new economic policies result in a meaningful reduction in the government’s debt deficit.

What are the other factors affecting the housing market in 2025?

Even if average mortgage rates fall to 1% by 2025, this will not make home buying affordable for most Americans, especially low- and middle-income households.

Since 2020, house prices have increased more than 40%. And while home price growth has since been slow, it has continued 5.1% every year. Prices are expected to rise by less than 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. Over the past few years, new home construction has been delayed by rising construction costs and strict zoning regulations. When home buying demand exceeds supply, prices rise.

That applies to current home inventory, as well. As most homeowners today have interest rates below 5%they are less inclined to sell because it means buying a new house at a higher rate. The “rate-lock effect” and the lack of new home construction effectively froze the housing market.

While experts expect the housing inventory to increase by 2025, it will take years to regain the ground lost.

Should you wait or buy in 2025?

If you are one of the millions to become a home owner waiting for rates to dropknow that the macroeconomic issues plaguing the housing market today are out of your control. Only you can determine if you are financially ready to buy a home and handle all of its costs.

“In 2025, I will not focus on mortgage rates,” said Jeb Smithlicensed real estate agent and member of CNET Money’s expert review board. Smith recommends prioritizing things that will lower your individual mortgage rate, such as saving for a larger down payment and improve your credit score.

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

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