Jerome Powell, chairman of the US Federal Reserve, speaks during a news conference following a … More
The Federal Open Market Committee is still broadly expected to cut interest rates in 2025 despite holding rates steady for the first two meetings of 2025. The next cut might come in June. Lower short-term interest rates could help move mortgage rates a little lower in 2025 according to most expectations. Currently the average 30-year mortgage rate stands at 6.7%, according to FRED economic data. Long-term mortgage rates have broadly remained in a 6% to 7% range since late 2022 with no obvious trend.
FOMC Interest Rate Cuts Expected In 2025
The FOMC is expected to cut interest rates in 2025. If so, that reality may nudge mortgage rates a little lower, though probable short term-interest-rate expectations are already baked into mortgage rates. That means that any unexpected moves from the FOMC will likely have a greater bearing on mortgage costs. Those unexpected scenarios could theoretically come from more dramatic cuts than expected, or a reluctance to move rates lower. Also, fixed income markets are watching for where interest rates will trend over the longer term, in addition to monitoring shorter-term moves.
Policymakers’ forecasts suggest that two cuts are likely in 2025 but that fewer cuts are possible. The expectations of fixed income markets are more dovish than the FOMC’s latest view, with anything between one and four cuts reasonably likely in 2025, according to the CME Fedwatch Tool. Currently, short-term rates stand at 4.25% to 4.5% after a series of rate cuts since summer 2024, though rates have been held steady at the first two FOMC meetings of 2025.
What happens will depend to a significant extent on incoming economic data. If inflation were to cool, that may give the FOMC more room to cut rates. However, recent expectations are that tariffs could nudge inflation higher in 2025. Beyond inflation the jobs market will be watched closely, too. Some survey data as well as recent stock market weakness implies that an economic slowdown could occur in the medium term. If that were to happen, then the FOMC may try to stimulate the jobs market with lower rates. However, for now, reported economic data has remained generally robust, even if survey data has become more pessimistic.
Other Implications For The Housing Market
It’s not just mortgage costs that will inform the trajectory of the housing market in 2025. Tariffs may increase the cost of certain supplies for new housing, such as lumber. That could cause the price of new homes to rise somewhat. However, economic data fully capturing the impact of recent tariffs has not been reported yet and U.S. tariff policy continues to evolve.
Also, immigration changes could impact labor availability for housing projects, though again for now these changes are forecasts rather than reality, such as UCLA’s economic analysis. Nonetheless, there’s a chance of home price inflation from input and labor costs in 2025, even if mortgage costs trend a little lower.
Mortgage Rate Forecasts
Generally forecasts call for slightly lower mortgage rates in 2025, but with volatility. For example, Ryan Price, chief economist at Virginia Realtors, stated in January, “We project mortgage rates to decline from current levels by the end of 2025, but the path will be bumpy, and the pace is likely to be slow.” Other analysis suggests that rates will move lower according to most expectations.
What To Expect
Mortgage costs may trend lower in 2025, but not by much. Less likely scenarios are that an economic slowdown causes interest rates to be cut more dramatically, or that a pick-up in inflation prompts the FOMC to keep rates closer to current levels. However, the most likely scenario according to forecasts is that long-term mortgage rates remain relatively close to the 6% to 7% band that we’ve seen in recent years, perhaps pushing nearer to 6% by the end of 2025.
