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In the post-pandemic era, homebuyers faced unprecedented challenges, as mortgage rates climbed to the highest levels since the early 2000s. Average rates in the 6.00% to 7.50% range left many would-be owners sitting on the sidelines, with 71% postponing their purchase in hopes of a future rate cut, according to BMO Financial Group. The high-rate environment also impacted the supply of homes, leaving fewer options for those still willing to buy.
“It has certainly made borrowing more expensive, and discouraged some households from becoming homeowners,” says Edward Coulson, professor of economics and public policy and director of the Center of Real Estate at UCI Paul Merage School of Business “It has also impacted current homeowners, who hold mortgages with low rates, from changing houses because they don’t want to trade in their low payments for higher payments.”
The good news is that, while challenges remain, the tides may be starting to turn. Average rates are down over a point since they peaked in the fall of 2023, and it’s now possible for many borrowers to get mortgages under 7.00%. Some encouraging inflation data even provides new hope for a rate cut at upcoming Federal Reserve meetings. This could have a major impact on borrowing costs at the end of 2024 and into 2025.
The big question for borrowers now is how low rates can go next year and whether they should wait for mortgage rates to fall before moving forward with looking for a home to call their own.
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How low could mortgage rates drop in 2025? Here’s what experts say
For future mortgage borrowers hoping for lower rates, there’s both good news and bad news. Most experts believe rates will fall in 2025, but the record-low rates of the pandemic era are most likely not returning any time soon.
Slowing inflation is likely to prompt a rate cut
Lower inflation levels are welcome news for future homeowners frustrated with today’s mortgage rates. Reduced inflation could prompt the Federal Reserve to finally cut interest rates. While the Fed doesn’t directly control mortgage costs, a reduction in the overnight rate at which banks borrow from each other can have a spillover effect on home loans.
“Mortgage rates will continue to fall into 2025 as the rate of inflation continues to drop towards the Fed’s goal of 2%,” says Melissa Cohn, regional vice president at William Raveis Mortgage.
Fed officials have signaled rate cuts are a possibility as soon as their September meeting. However, rumors of a rate cut in early 2024 proved to be premature as inflation remained persistent, so there’s never a guarantee that projections will become a reality. If the Fed doesn’t act, expectations of an upcoming mortgage rate reduction are unlikely to pan out.
“Mortgage rates are one of the trickiest numbers to forecast,” says Ali Wolf, chief economist at Zonda, a new home construction data company. While Zonda predicts rates to average between 5.9% and 6.2% in 2025, Wolf says that this estimate is “predicated on a slowing but growing economy, moderate levels of inflation, and multiple Fed rate cuts throughout the year.”
However, Wolf cautions that “if the economy starts to pick up steam again and the Fed becomes reluctant to quickly lower short-term rates, mortgage rates could come in higher than expected.”
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Bad economic news could lead to better mortgage rates
Broader economic conditions could also impact whether mortgage rates will fall, and how far.
“Mortgage rates encapsulate how Fed officials and investors feel about where the economy is and where it is going,” Wolf says. “Rates could go lower than consensus in the event of an economic recession.”
A downturn is a definite possibility, and, in fact, evidence of slower economic growth and weakening demand for labor are both indicators of imminent economic trouble. J.P. Morgan Chase now projects the likelihood of a recession at 35% in 2024 and 45% in 2025. Cohn believes these signs of slower growth could have a favorable impact on rates.
“Bad news in the economy – such as the last jobs report – is always good news for mortgages,” she says.
Just how low could rates go if the country falls into a recession?
“I expect mortgage rates to go down to between 5.75% – 6.00% in 2025,” says Andrew Whatley, performance metrics analyst with Lower. His belief is based on the likelihood of a mild recession in 2025, as well as rising unemployment. However, he believes the 10-year treasury rate + 2.25% is likely a “solid base” for rates, which he doesn’t believe will decline below 5.5% next year.
Higher rates may still be the norm for the foreseeable future
With most experts in agreement that rates will decline, would-be buyers have reasons for optimism — but must also come to terms with the harsh reality that rates are still unlikely to go down as much as they might prefer.
“There are still a lot of unknowns, but right now, I expect mortgage rates will fall further in 2025 but will stay above 6%,” says Lisa Sturtevant, PhD and chief economist with Bright MLS. “The Fed will continue to cut the short-term Federal funds rate in 2025, but we are in a new era where a 6% rate on a 30-year fixed rate mortgage is going to be the norm.”
This is in line with other projections, including Fannie Mae’s August housing market forecast, which predicts rates will start the year at 6.2% in the first quarter of 2025 before gradually declining to 5.9% by the last quarter of the year.
While rates remaining at around 6.00% may be a difficult adjustment for those who came of age in the post-2008 recession era when borrowing costs were very low, historical data from Freddie Mac shows that mortgages in the 3.00% to 4.00% range may actually have been the anomaly.
The bottom line
Even if a dramatic rate drop isn’t on the table, borrowers may not want to sit on the sidelines until 2025. Instead, they may consider refinancing their mortgage soon or seeking out the lowest mortgage rate right now to avoid missing out on the opportunities available in today’s market.