FILE- A for sale sign stands outside a home on the market in the Alamo Placita neighborhood Tuesday, … [+]
Mortgage rates are expected to be broadly stable for the remainder of 2025 with Fannie Mae estimating that 30-year mortgage rates will average 6.8%, a little higher than previously forecast. That’s as the Federal Open Market Committee is expected to be patient in cutting interest rates. Potential tariffs also add uncertainty to the economic outlook.
Mortgage Rates Have Leveled Off
After increasing sharply with inflation after 2022 from 3% to ultimately peaking at over 7.7% in October 2023, 30-year mortgage rates have mostly trended between 6% and 7% since 2024. That has hurt housing affordability, which is a major concern for 69% of Americans according to the Pew Research Center.
More recently, since September 2024, mortgage rates have increased as inflation has accelerated a little and the FOMC has been more reluctant to cut short-term interest rates as a result. The yield curve has steepened a little, too, which has meant longer term mortgage rates have moved up even if shorter-term borrowing rates have been more stable.
Risks To The Outlook
There are risks to this outlook. Trade policy won’t impact mortgages directly, but it is likely to be a factor in the FOMC’s interest rate decisions. Survey measurements of long-term inflation expectations have recently moved up according to University of Michigan data, perhaps in part due to the potential impact of tariffs. That may be a concern for FOMC and slow potential interest rate cuts. If so, that may lead mortgage costs rates to remain elevated for longer.
On the other hand, inflation could cool, especially if shelter costs were to ease in Consumer Price Index data. We haven’t seen that in recent months, in fact inflation has accelerated a little, but were inflation to cool, it may give the FOMC a reason to bring rates lower.
A less positive scenario is a U.S. recession. There are some signs that the U.S. consumer may be weakening, such January’s seasonally adjusted drop in retail sales of 0.9% month-on-month. Were a recession to occur, then the FOMC would likely cut rates, that would help bring mortgage costs lower. However, a recession may mean other problems for potential home buyers.
Freddie Mac and Fannie Mae intermediate most U.S. mortgages. If those organizations exit the conservatorship that they’ve been in since the financial crisis in 2008, there is some suggestion that that change may bring mortgage costs down. That’s something the Trump administration has signaled a willingness to do previously, though any timeline is unclear.
What To Expect
Few expect long-term mortgage rates to return to the 3% levels seen during the pandemic. Nonetheless, mortgage costs may trend down from current levels over the coming years, especially if inflation cools and the FOMC ultimately cuts interest rates.
For now, the view of fixed income markets is that shorter term interest rates are likely to come down in 2025 but at a slower pace than previously forecast. That may mean mortgage costs remain in a 6% to 7% range for a little while longer. Mortgage rates could fall faster, but unfortunately were that to happen it might be in response to increasing economic risks for the U.S.
