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Economists say mortgage rates aren’t likely to come down much this year after all, keeping many would-be homebuyers and sellers on the sidelines and chilling the prospects of a rebound in sales in 2025 from the lowest level in 30 years.
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Forecasts issued this week by Fannie Mae and the Mortgage Bankers Association reflect the runup in long-term rates during the fourth quarter of 2024 that’s continued this year.
Since hitting a 2024 low of 6.03 percent on Sept. 17, mortgage rates have climbed by a full percentage point, as bond market investors who fund most mortgages worry that Federal Reserve policymakers haven’t yet tamed inflation.
Rates for 30-year fixed-rate conforming mortgages climbed above 7 percent this month for the first time since May 2024, according to rate lock data tracked by Optimal Blue.
Forecasters at Fannie Mae now expect mortgage rates will come back down only gradually, to an average of 6.5 percent by the fourth quarter of 2025, and 6.3 percent by Q4 2026. Last month, Fannie Mae economists predicted rates on 30-year fixed-rate mortgages would fall to 6.2 percent by the end of this year and to 6.0 percent next year.
Mark Palim
“While we still see signs of resilience in the labor market, the higher mortgage rates that are associated with a growing economy will likely continue the affordability challenges faced by many potential homebuyers,” Fannie Mae Chief Economist Mark Palim said, in a statement. “Due to the ongoing lock-in effect and affordability constraints, we currently expect another year of sluggish existing home sales.”
The good news is that incomes are expected to rise faster than home prices and rents this year, and new homes are more available and priced competitively with existing homes in many markets, Palim said.
“Otherwise, our expectation that home sales activity will remain limited, combined with the elevated rate environment, reaffirms our view that on a national level, the 2025 housing market is shaping up to feel a lot like 2024.”
Fannie Mae forecasts that 4,887,000 new and existing homes will change hands this year, 119,000 fewer transactions than the 5,006,000 sales projected in last month’s forecast.
Higher rates here to stay?
Source: Fannie Mae and Mortgage Bankers Association forecasts.
The MBA’s forecast has also been revised and is even more pessimistic than Fannie Mae’s about the prospect for rates to come down in time for the spring homebuying season.
While Fannie Mae economists think rates on 30-year fixed-rate loans could drop to an average of 6.6 percent during the second quarter of 2025, the MBA forecasts that they’ll still be averaging 6.9 percent in Q2.
A surprisingly strong jobs report on Jan. 10 had convinced investors that the Fed might not cut rates again until June — and sparked discussion that central bank policymakers might even start raising rates.
Rates have eased slightly from a 2025 high of 7.05 percent registered on Jan. 14 following the release of a “relatively benign” CPI report that ended speculation that inflation might force the Fed to raise rates this year.
But futures markets tracked by the CME FedWatch tool showed investors expect the Fed to keep rates where they are at its Jan. 29 and March 19 meetings, with only about a 50 percent chance of a May 7 rate cut.
President Donald Trump has said high interest rates hurt the economy and will demand that the Fed start cutting rates again.
“I think I know interest rates much better than they do, and I think I know it certainly much better than the one who’s primarily in charge of making that decision,” Trump said Thursday, alluding to Federal Reserve Chairman Jerome Powell, Reuters reported.
But the Fed doesn’t have direct control over long-term bond yields and mortgage rates, which are determined by supply and investor demand. As the Fed cut short-term rates at its Sept. 18, Nov. 7 and Dec. 18 meetings, mortgage rates continued to rise.
“Longer-term interest rates have risen in recent months even as the Fed continued to cut the short-term rate at its December meeting,” Fannie Mae economists said in commentary accompanying their latest forecast. “This divergence reflects the bond market’s repricing based on updated expectations for fewer additional rate cuts over the coming years in response to incoming economic and other data.”
Fannie Mae economists say the now expect the Fed to cut the short-term federal funds rate by 25 basis points in both June and September, and then leave them there.
“Given Fed guidance, the rise in rates, and the shift in risk toward firmer growth over the past month, we have removed the two cuts we previously had predicted for 2026,” Fannie Mae forecasters said.
Home price appreciation projected to cool
Source: Fannie Mae forecast, January 2025.
Elevated mortgage rates make many would-be sellers reluctant to put their homes on the market because they don’t want to give up the low rate on their existing mortgage.
The resulting lack of inventory in many markets has helped keep home prices — which soared during the pandemic — from coming back to Earth.
Fannie Mae economists estimate that national home prices rose 5.8 percent in 2024, and will go up another 3.5 percent in 2025 — a tenth of a percentage point less than forecast in October.
Fannie Mae forecasters then expect annual home price appreciation to decelerate to 1.7 percent by Q4 2026.
Tepid sales rebound forecast for 2025
Source: Fannie Mae forecast, January 2025.
Following double-digit drops in 2022 and 2023, sales of existing homes are also projected to be down by about 1 percent in 2024, to 4,058,000 — a level not seen since 1995.
With mortgage rates and home prices expected to stay elevated in 2025, Fannie Mae projects modest 2 percent growth in existing home sales this year, to 4,150,000, followed by a stronger 8 percent bounce in 2026, to 4,500,000.
We have therefore trimmed our total home sales forecast for 2025 to 4.89 million (previously 5.00 million) and for 2026 to 5.25 million (previously 5.47 million).
Inventories of homes for sale were up 31 percent in December from the start of 2024 according to Realtor.com data, which should help boost sales.
“However, the rise in inventories has not been driven by a proportionally faster pace of new listings over this past year, but rather by an increase in the time it takes to sell a home,” Fannie Mae economists said. “We interpret this to mean that in some regions, the pool of potential buyers on the sidelines has shrunk and there is not sufficient purchase demand from first-time buyers, in particular, at current prices and mortgage rates.”
Most regions with growing inventories are in the Sun Belt and other metros that have seen considerable new homebuilding in recent years, Fannie Mae forecasters noted, and those areas are likely to see stronger sales and home price deceleration.
No building boom expected this year
Source: Fannie Mae forecast, January 2025.
Housing analysts see increasing the supply of homes as a key piece of solving affordability issues, but Fannie Mae forecasters see construction of new single-family homes staying flat at around 1 million units a year this year and next.
Both single-family and multifamily home construction are expected to contract this year, bringing total home construction down 3 percent from 2024 levels, to 1,312,000 units.
With elevated mortgage rates slowing the pace of sales, builders have been focused on selling the homes they’ve already finished.
“Many of the publicly traded homebuilders have reported large declines in their operating margins as larger incentives have been required to move sales this past half year,” Fannie Mae economists noted. “While there is a limit to how much homebuilders are willing to offer buydowns and other concessions, the large builders continue to provide forward guidance that emphasizes a commitment to hitting sales and delivery targets, and a willingness to use deeper concessions to do so.”
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