In comparison with historical norms prior to the pandemic years, home sales are expected to remain low as long as mortgage rates remain well over the 6% level. According to recent projections, the Federal Reserve doesn’t see inflation subsiding to 2.0% on a consistent basis until early 2026. This will mean higher but gradually declining short-term interest rates throughout 2025.
Two other wild cards include the potential impact of tariffs and the deportation of millions of undocumented immigrants, both of which could be destabilizing to the economy – especially in agriculture and construction – and lead to a rebound in inflation. Since mortgages are influenced much more by the 10-year Treasury bond than the Fed’s short-term rates, if investors demand higher bond rates in exchange for additional risk, that reduces the Fed’s influence on long-term mortgage rates and rates could stay elevated.
Still, given that consumers have become more used to higher borrowing rates for homes, those with sufficient incomes and down payments may see 2025 as a perfect year to jump back into the housing market, especially as the lock-in effects of sub-6% interest rates continue to wane.
As of the second quarter of 2024, although nearly 86% of homeowners with mortgages had interest rates below 6%, that share is down from nearly 93% two years ago and continues to decline as sellers are forced to list their homes for a variety of reasons such as job changes, the need for more space as well as the three Ds: death, divorce and debt.
Rob Cook, Chicago-based vice president and chief marketing officer for Discover Home Loans, advises existing homeowners looking to sell to first compare their existing and future mortgage payments, and perhaps consider renovation as an option.
"A home equity loan could be an appealing option for financing home improvement projects, as it allows current homeowners to use the available equity they've built in their homes without modifying their existing mortgage," he said in an emailed response. For those who need to move, he suggests other options aside from the traditional fixed-rate mortgage. "If rates remained elevated, there could be increased demand for ARMs (adjustable-rate mortgage) or other variable rate products. Homeowners should be mindful of how these types of mortgages could result in higher rates in the future."
With the November election in the rearview mirror, potential homebuyers are already preparing well in advance of the traditional spring selling season: Redfin's Homebuyer Demand Index, which tracks tours and other services requested from its agents adjusted for seasonality, was up 7% year-over-year during the first week of December to approach its highest level since September 2023. In addition, the Fannie Mae Home Purchase Sentiment Index rose again in November to its highest level since February 2022, as well as rebounding sharply from the all-time survey low set just over two years ago.