Alert for future homeowners: Mortgage rates to exceed 6% in 2025
As we progress into the new year, the US housing market remains in the grip of high mortgage rates, creating a difficult outlook for both prospective homebuyers and those looking to refinance their existing homes.
Recent data reveal a significant drop in mortgage applications during the Christmas holiday season, along with predictions that rates will remain elevated throughout the year.
Data from the Mortgage Bankers Association (MBA) reveals that the average interest rate on 30-year fixed mortgages rose to 6.97% in the final week of December 2024, representing the highest level in almost six months. This follows a rise of 14 basis points in the previous week, highlighting the volatility of borrowing costs. Elsewhere, home purchase applications fell almost 7% to their lowest level since mid-November, while refinancing applications plunged more than 23% to their lowest level in a year.
Despite some fluctuations due to the end-of-year holidays, the general trend remains clear: high mortgage rates are reducing demand and defining the housing market outlook.
The reason behind high mortgage rates
High mortgage rates are linked to Treasury yields, which serve as a benchmark for long-term borrowing costs. While the Federal Reserve has begun to cut its benchmark interest rate – making other forms of borrowing, such as car loans and credit cards, cheaper – mortgage rates have not had the same effect. Instead, 10-year Treasury yields are still elevated due to continuing inflation concerns.
Investor fears about inflation have been fuelled by expectations of higher deficit spending under Donald Trump’s administration, as well as proposed tariffs on imported goods, both of which are traditionally inflationary. These dynamics have kept Treasury yields high, which in turn has kept mortgage rates elevated.
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Despite these challenges, there are signs that prospective homebuyers are already becoming accustomed to this environment. Data from the National Association of Realtors showed that in November 2024, when average mortgage rates hovered around 6.8%, an indicator of contract signings for pre-owned homes reached its highest level since early 2023. This suggests that some buyers are going ahead with their plans despite unfavourable financing conditions.
Financial institutions and industry analysts offer different forecasts for the state of 30-year fixed mortgage rates at the end of 2025. While most forecasts predict some moderation from current levels, rates are expected to remain above 6%.
CNBC mortgage predictions for 2025
Mortgage Bankers Association: Rates are expected to range between 6.4% and 6.6%.
Realtor.com: Expects rates to end the year around 6.2%.
Wells Fargo: Expects a slight decline, with rates averaging 6.3%.
Goldman Sachs: Predicts they will remain above 6% until 2025.
While these forecasts offer some hope for an improvement, they also highlight the likelihood that rates will remain high compared to what was seen prior to the pandemic. For buyers, this means that borrowing costs will remain high, which could affect affordability and demand.
Those looking to buy a home may have to adjust their budgets or consider alternative financing options. Similarly, homeowners wishing to refinance may have to wait for more favourable conditions.
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