How quickly things can change! Just a few months ago, economists thought interest rates would fall to the 5% range by the second half of 2025. Now, however, the 30-year fixed mortgage rate is expected to stay between 6% and 6.5% for the next two years. To add insult to injury, mortgage rates hit 7% recently! As Federal Reserve Chair, Jerome Powell says “Forecasts are highly uncertain.” No kidding!
What’s Going On?
Mortgage rates fluctuate for a number of reasons, including economic conditions, investor demand and Federal Reserve policy, among others. When there is a lot of uncertainty, mortgage interest rates tend to bounce up and down, as they have over the past few months. Economists had predicted lower mortgage rates because the U.S. economy was expected to fall into a recession, but that didn’t happen. In fact, factors such as employment and GDP growth have been outpacing expectations, which indicate a strong economy. When the economy is strong, “the Fed can afford to wait longer to cut interest rates.”
What Does this Mean for Potential Home Buyers?
Unfortunately, it looks like high interest rates (6% or higher) are here to stay in 2025 and beyond, which will lead to a slower housing market and moderate price increases. Specifically, if you’re shopping for a new home, you can expect:
Reduced affordability: Higher interest rates mean higher monthly payments, so buyers can afford “less house.” Higher interest rates also make it harder for many buyers, especially first-time homebuyers, to qualify for loans.
Slower sales: Decreased affordability and the fact that many potential buyers will put off buying this year will likely cause a slower pace in home sales.
Moderate price increases: Experts still expect prices to increase, due to less inventory, but the rate of growth should be slower than it has been in recent years. Some analysts predict average home prices to increase 4.4% in 2025. However, certain markets may see prices stall or even decrease slightly.
Less inventory: Homeowners who are locked into low mortgage rates will be reluctant to sell their homes and buy at higher rates. By choosing to stay in their homes, the number of available homes for sale with be low.
It’s a double-edged sword: while persistently high mortgage rates should put downward pressure on home prices, the lack of supply causes prices to increase. There is a glimmer of hope, however, as some analysts expect a modest drop in interest rates later in the year, and a slight increase in available homes on the market, which may help home buyers.
Should you Buy a Home in 2025?
There is no easy answer to this question. The reasons for buying or selling a home are very personal, and can be driven by your financial situation, job changes, family growth, retirement plans, and more. In other words, you can’t always wait until conditions are right to make a move. If you’re downsizing for retirement, for example, or need additional room for a growing family, waiting may not be an option.
Experts say that if your finances are solid, you’ve got enough for a good down payment, and your job feels secure, it’s probably a good time to buy. As rents keep increasing, buying a home can help you lock in housing costs, and since home prices are expected to increase, you might be able to get the home you want for less than it will be in the future.
Of course, some analysts advise holding off until later in the year (fall of 2025), as they expect another small drop in interest rates, along with home prices. (Remember the comment about forecasts being uncertain!)
Affordability is the key. Once you take into account all the costs of buying a home, including closing costs, mortgage payments, homeowners insurance, property taxes, and maintenance, and then compare these costs to your income and budget, that is the best determinant of whether you’re ready to buy a home and how much house you can afford. No one wants to be stretched too thin financially or be house poor.
Get Some Good Advice
If you’re undecided about whether now is a good time to buy or would like to know how much you can afford, talk to a professional real estate agent. It’s also smart to get preapproved for a mortgage, so you know how much you can qualify for and help you focus your search. Also, don’t be afraid to shop around with different mortgage lenders to see who can give you the best rate. Finally, if you’re feeling frustrated by home prices, consider expanding your search to different neighborhoods or locations – prices can vary a lot. Again, a professional real estate agent can be invaluable in your quest to find an affordable home that fits your needs.
