Before the presidential election, the path to lower mortgage rates seemed relatively clear-cut: As long as official inflation figures continued to go down, the Federal Reserve would carry out more interest rate cuts, helping consumer borrowing costs gradually decline in 2025.
That was then. Now housing market experts aren’t so certain.
“Mortgage rates are not going to come down as much as we had expected, and affordability will still be a challenge,” said Lisa Sturtevant, chief economist at real estate agency Bright MLS.
Many economists say President-elect Donald Trump’s proposed policies, which include tax cuts, sweeping tariffs and mass deportations of undocumented immigrants, could stimulate demand, increase deficits and cause inflation to reheat. That could prompt the Fed to delay future rate reductions, which in turn would keep home loan rates high.
Elevated mortgage rates aren’t the only burden for would-be homebuyers. As mortgage rates soared in 2022, home prices hit record highs and the inventory shortage persisted, making homeownership increasingly inaccessible for the majority of US households.
What does today’s mortgage market tell us?
Mortgage rates have fallen from their 2023 peaks, though the decline has been gradual, with some volatility along the way. Over the past 12 months, the average 30-year fixed mortgage rate has mostly fluctuated between 6.5% and 7.5%.
Most housing economists had expected mortgage rates to hit 6% by the end of 2024 and move into the mid-5% throughout 2025. But mortgage rates are still painfully high, around 7%, and the forecast for next year has only gotten cloudier.
Despite two interest rate cuts by the Fed this fall, mortgage rates reversed course and went up, not down. Though the central bank’s monetary policy impacts the housing market (e.g. banks typically pass along rate hikes to consumers in higher rates on longer-term loans, including mortgages), the Fed doesn’t set mortgage rates directly — lenders do.
Recent jumps in the mortgage market were due in part to bond market investors “pricing in” the expectation of a second Trump administration. Mortgage interest rates are closely tied to the 10-year Treasury bond yield, and bond market investors drive yields higher or lower based on what they believe will happen in the future — not what’s happening now.
“While there is uncertainty on the extent of the inflation impact of Trump’s policies, higher inflation expectations tend to lead to higher bond yields and mortgage rates,” said Beth Ann Bovino, chief economist at U.S. Bank.
Could mortgage rates increase in 2025?
The same reason mortgage rates surged in 2022 is also what could cause them to increase 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 impacts the bond market, where mortgage rates are determined. High inflation curtails investor demand for longer-term bonds, causing their prices to fall and mortgage rates to increase.
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 are likely to pass those costs onto consumers and raise prices. Tax cuts could also decrease fiscal revenue and raise national deficits, resulting in higher long-term bond yields.
The Fed has a 2% target rate for annual inflation. If the official inflation rate moves much higher than that in 2025, the central bank is less likely to enact interest rate cuts, which could put upward pressure on mortgage rates.
“I expect rates to range between 5.75% and 7.25%,” said Logan Mohtahsami, lead analyst at HousingWire. If future economic data is stronger than expected, it’s likely mortgage rates will move to the high end of that range, Mohtashami said.
Could mortgage rates drop in 2025?
Lower mortgage rates next year are still possible, but a few conditions must be met first.
“At the most basic level, rates are always going to be influenced by the state of the economy and inflation,” said Matt Graham of Mortgage News Daily.
If Trump’s policies don’t supercharge inflation in 2025, then it would take significantly weaker economic conditions (including a declining labor market) and a drop in 10-year Treasury yields to open the door to lower rates.
“If the unemployment rate rises or hiring slows considerably, then borrowing costs, including mortgage rates, could fall,” Sturtevant said. The Fed typically responds to economic downturns by cutting interest rates.
In that case, 30-year fixed mortgage rates could fall just below 6%, Mohtashami said. And if the financial markets believe Trump won’t meaningfully lower deficits, it’s unlikely mortgage rates can move much lower than that.
How much can mortgage rates change in one year?
Mortgage rates fluctuate daily, usually by just a few basis points (one basis point is equivalent to 0.01%). Over the course of a year, mortgage rates can change a lot or not very much at all.
Historically speaking, the biggest swings in mortgage rates were accompanied by economic catastrophes (such as surging inflation or the start of a recession) that drove bond yields significantly higher or lower for a sustained period of time.
In 2022, for example, mortgage rates increased from around 3% to above 7% within the span of 10 months due to surging inflation and the Fed’s aggressive rate hikes. That’s a 4% difference in less than a year. Compare that with 2024: The difference between this year’s peak (7.33%) and bottom (6.1%) is just over 1%.
Mortgage rates might move in a similarly narrow range in 2025, particularly if economic growth remains steady and future data doesn’t give investors cause for concern.
But a new presidential administration, shifts in the geopolitical outlook and the potential for inflation to reignite all have the power to move mortgage rates by more than 1% in either direction, said Colin Roberston, founder of the housing market site The Truth About Mortgage.
For example, in the dire scenario where the US moves toward a recession and inflation falls well below target, mortgage rates could get to the 4% range, according to Graham. “In the opposite scenario, where the economy is strong, inflation persists and national deficits increase, mortgage rates could move toward or above 8%,” Graham said.
Other factors affecting the housing market in 2025
Even if mortgage rates fall in 2025, it won’t make homebuying affordable for most Americans, particularly low- and middle-income households.
Since 2020, home prices have increased more than 40%. And while home 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, said Selma Hepp, chief economist at Core Logic.
Part of the reason home prices are so high is that the housing market is short roughly 1 million to 4 million houses. Over the last several years, new home construction has lagged due to rising construction costs and strict zoning regulations. When homebuying demand outweighs supply, prices go up.
That applies to existing home inventory, as well. As most current homeowners have interest rates below 5%, they’re less inclined to sell since it would mean buying a new home at a higher rate. Both factors have effectively frozen the housing market.
While experts expect housing inventory to improve in 2025, it will take years to make up for the ground lost.
How to approach the housing market in 2025
If you’re one of the millions of would-be homeowners waiting for rates to drop, know that the macroeconomic issues plaguing the housing market today are out of your control. Only you can determine if you’re financially ready to purchase a home and handle all its expenses.
“In 2025, I would not focus on mortgage rates,” said Jeb Smith, licensed real estate agent and member of CNET Money’s expert review board. Smith recommends prioritizing things that can lower your individual mortgage rate, like saving for a bigger down payment and boosting your credit score.
Instead of trying to time the real estate market, Smith said to focus on the factors you can actually control.
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