Mortgage rates could revive housing market in 2025

The Fed cut interest rates for the first time in four years last month, and most experts predict two more cuts by the end of 2024.

Fannie Mae predicts the average mortgage rate will dip to 5.7% by the end of 2025, a compelling contrast from the 8% mortgage rates seen in October 2023. Despite mortgage rates falling modestly over the past year, housing sales remain sluggish and are expected to reach a thirty-year low.

We spoke with Danielle Hale, Chief Economist at Realtor.com, to discuss mortgage rate predictions and how the housing market will change over the next year.

Homeowners who managed to lock in mortgages below 4% are unlikely to sell, and many believe a housing market correction is needed to fix the inventory supply issue.

Lower mortgage rates can increase housing supply to make homeownership more affordable

The two main barriers to homeownership are lack of supply and lack of affordability, which are interconnected. Homeowners aren’t incentivized to sell their homes if they’re locked into mortgage rates far lower than current levels, leading to an inventory shortage that continues to drive up prices.

Hale explains how continued Fed interest rate cuts will lower mortgage rates and bolster the housing market.

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“As the Fed normalizes policy, I expect we'll see mortgage rates decline,” she said. “That should provide a nice boost for buyers. It increases their purchasing power or enables them to cut back on the amount they're putting towards their home payment. That should boost housing demand.”

“It also has the potential to increase housing supply,” she explained. “Many existing homeowners are locked into their current mortgage rate because it's so far below the rates available in the mortgage market.”

A family is seen together in their backyard.

Challenging housing market conditions will ease over time

Mortgage rates coming down from their twenty-year high will be the catalyst needed to spur housing sales for buyers and sellers.

“It's still the case that over half of homeowners with a mortgage have a rate that's under 4%, so we're not likely to totally unlock those homeowners anytime soon,” she continued.

Hale notes that prospective home buyers may not see immediate results following the September rate cut, but months of continued interest rate slashes will lead to a healthier and less competitive housing market.

“Every step down in the mortgage rate will make a difference for someone who can move forward with a home sale and likely a future home purchase. And that is going to help improve conditions in the housing market.”

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