It’s only January and we’re already looking for clues that the housing market will change in 2025. Homeownership remains a challenge as average mortgage rates hover north of 7%, home prices refuse to ease and an inventory shortage locks out buyers.
Following his inauguration on Jan. 20, President Donald Trump signed an executive order on the cost-of-living crisis to pursue action to “lower the cost of housing and expand housing supply.”Â
But housing market experts say dramatic improvements won’t happen overnight.Â
“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.
During his campaign, Trump repeatedly claimed that mortgage rates will return to lows of around 3% (rates are more than double that today), yet experts say the president is not dealing with the same economy as his first term.Â
“There are similarities, like the trade wars and the fear of government spending,” wrote Colin Roberston, founder of the housing market site The Truth About Mortgage. “But we’re also starting from a much different place. The highest mortgage rates in 25 years versus rock-bottom ones when he won in 2016.”Â
Moreover, economists fear that Trump’s other 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 Federal Reserve to delay future rate reductions, which in turn would keep home loan rates high, not bring them down.
In any case, the Fed doesn’t set mortgage rates directly. But neither does the White House — lenders do. Mortgage interest rates, which are closely tied to the 10-year Treasury bond yield, are largely determined by what bond market investors believe will happen in the future.Â
For example, though housing economists had expected mortgage rates to drop to 6% by the end of 2024, they moved toward 7% as bond market investors “priced in” the expectation of a tariff-induced inflation bump.Â
Forecasts for 2025 show average 30-year fixed mortgage rates hovering around the mid-6% range for a while. Logan Mohtahsami, lead analyst at HousingWire, expects rates to range between 5.75% and 7.25% throughout the year.Â
What do Trump’s policies mean for mortgage rates?
Lower mortgage rates are not impossible this year, but they’re not in the bag. The same reason mortgage rates surged back in 2022 is also what could cause them to increase this year: inflation.Â
Inflation is a key measure of the economy’s health and influences whether the Fed adjusts its benchmark interest rate up or down. In the bond market, high inflation curtails investor demand for longer-term bonds, causing their prices to fall and mortgage rates to increase.Â
If Trump’s proposals for extensive tariffs are implemented, businesses would likely pass those costs onto consumers and raise prices, leading to greater inflation. So far, the new president is threatening a 25% tax on Canadian and Mexican imports and a possible 60% tariff on China, with a universal tariff still on the table.Â
“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.
If the new administration’s policies prove to be inflationary in 2025, the central bank is also less likely to enact interest rate cuts, which could put upward pressure on mortgage rates. Furthermore, Trump’s proposed tax cuts could decrease fiscal revenue and raise national deficits, resulting in higher long-term bond yields.
What could cause mortgage rates to decrease in 2025?
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.Â
“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, and banks and lenders then pass along rate cuts to consumers in less expensive longer-term loans, including mortgages.Â
For instance, the Fed cut interest rates to near zero at the start of the pandemic, prompting a dramatic decline in home loan rates. Just before Trump left office in early 2021, mortgage rates bottomed out just below 3%.Â
Provided the economic data gets weaker and the central bank carries out additional reductions, 30-year fixed mortgage rates could fall just below 6% in 2025, Mohtashami said. But it’s unlikely mortgage rates can move much lower than that unless new economic policies result in a meaningfully lower government debt deficit.
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%). The mortgage market is also prone to volatility. Over the course of a year, mortgage rates can change a lot or not very much at all. White House policies can certainly impact rate movement, but the president doesn’t have the power to dictate rates.
Historically speaking, the biggest swings in mortgage rates were accompanied by economic catastrophes (e.g., surging inflation, the start of a recession, etc.) 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 to 2024: The difference between last year’s peak (7.33%) and bottom (6.1%) is just over 1%.Â
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.Â
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 Robertson.
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 Matt Graham of Mortgage News Daily. “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.Â
What else is affecting the housing market in 2025?
Even if average mortgage rates were to fall by 1% in 2025, it won’t make homebuying affordable for most Americans, particularly low- and middle-income households.Â
Since 2020, home prices have increased more than 40%. And while home price growth has since slowed, it’s still up 6.3% 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 one to four 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.Â
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 the “rate-lock effect” and the lack of new housing construction have effectively frozen the housing market.Â
While experts expect housing inventory to improve in 2025, it will take years to make up for the ground lost.
Should you wait or buy a home 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. Â
“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.
More on today’s housing market
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