Mortgage Rate Forecasts for 2025: A Misstep

As we approach the end of December, many forecasts for mortgage rates in 2025 have been released. Sadly, it seems that many of these predictions have already proven to be inaccurate.

A majority of housing market experts anticipated that mortgage rates would remain in the 6% range throughout 2025. The most optimistic forecasts suggested that the average rate for a 30-year fixed mortgage would hover in the low 6% zone. However, with stubborn inflation data not declining as quickly as anticipated, Federal Reserve Chair Jerome Powell altered his tone in the December 19 meeting. As a result, the bond market reacted negatively, causing mortgage rates to rise once again above 7%.

Although rates may eventually decrease at various points during the year, it is significant that 2025 is starting with mortgage rates in the 7% range—a figure not predicted by any major forecasts. This means that those making predictions have already missed the mark before the new year has even begun.

This situation is not unprecedented; many forecasters were also incorrect about mortgage trends in 2024. As of late 2023, the 30-year fixed mortgage rate neared 8%, a peak not seen in decades. Back then, most analysts were predicting that rates would start to decline in 2024, possibly stabilizing around 6% or lower by now. Unfortunately, for homebuyers in 2024, mortgage rates remained higher for a longer period than expected, averaging 6.72% throughout that year according to Freddie Mac.

Hopes remain that forecasters might be more accurate this time around. Most analysts currently believe that mortgage rates will continue to be elevated throughout 2025. The prevailing view is that few factors will prompt rates to dip into the low 5% range. A year ago, there were several optimistic forecasts predicting a shift into the 5% range by the end of 2024, which ultimately did not materialize. As such, forecasters are now less optimistic for the coming year.

The General Consensus on 2025 Mortgage Rates

While this year's outlooks are less optimistic compared to last year, many forecasts—save for a few exceptions like HousingWire—failed to predict that mortgage rates could rise above 7% during 2025. Yet, at the end of 2024, rates are indeed at that level. Given the new inflation data and the Fed's dwindling confidence in the prospect of rate cuts in 2025, the trend is tilting upward for mortgage rates as we enter a new year.

When assessing various forecasts for 2025, it can sometimes be challenging to make direct comparisons. Some reports provide an average rate for the year while others suggest a range without specifying an average. For example, the economics team at the National Association of Realtors (NAR) anticipates rates to be “near 6%” for the year. Meanwhile, strategists from Goldman Sachs expect rates to stay “above 6%.” Analysts at Zillow are optimistic rates will drop by the end of the year, albeit with fluctuations along the way. Conversely, experts from Realtor.com project an average of 6.3% for the year, with an ending rate of 6.2%.

To clarify these differing market expectations, a table has been compiled summarizing the key stated predictions from these organizations. For forecasts offering a range, the annual average within that range has been calculated, and descriptive forecasts have been interpreted accordingly.

According to the HousingWire forecast, mortgage rates for 2025 could range between 5.75% and 7.25%.

Some critics mock the broad 150 basis point range in this prediction, viewing it as a lack of decisiveness. However, this range reflects the current market, which starts at a high point, coupled with the potential of negative news that could push rates even higher, potentially exceeding 7%. Conversely, if favorable macroeconomic news occurs, there is a chance for rates to dip below 6% at some point in the year. The volatility seen in the mortgage market in recent years has been significant, with trading ranges witnessing fluctuations of 350 basis points, 200 basis points, and 140 basis points, respectively. A similar volatile range is expected for rates in 2025.

The Lower End of Predictions

To achieve mortgage rates averaging “near 6%,” one must assume a reduction in inflation and softer employment data. The bond market will need to be reassured that the economy is cooling for rates to lower. Expectations like these have persisted for three years, with many hoping 2025 will finally see them come true.

Additionally, the lower end of the forecast may benefit from a decrease in mortgage spreads—the risk premium between the 30-year fixed mortgage rate and the yield on the 10-year treasury bond. Spreads have been high for the past three years but showed signs of decline by late 2024. The minimum rate predicted by HousingWire (5.75%) considers a scenario where the 10-year yield drops to about 3.5% while the spread eases to 225 basis points. This fortunate pairing would yield mortgage rates at 5.75%.

The Upper End of Predictions

Redfin offers one of the most cautious estimates for 2025 mortgage rates, forecasting an average of 6.8% for each quarter of the year. The upper end of HousingWire's predictions suggests that mortgage rates could occasionally exceed 7%, potentially reaching as high as 7.25%.

Such pessimistic predictions rely heavily on unexpected higher inflation rates or significant economic performance, which could quickly spike interest rates. Recent events, such as the Fed meeting in December, demonstrate how swiftly circumstances can change.

Fostering Flexibility in Predictions

Mortgage rates did experience a slight decline in the third quarter of the past year, but with the presidential election approaching, this brief relief proved short-lived. One major challenge in making these forecasts is the countless external factors influencing bond markets. While efforts are made to estimate these variables, unexpected occurrences are likely. Thus, a broad range of trading conditions is anticipated for the year ahead. Given recent trends, it's clear that 2025 is poised to be a tumultuous year for mortgage rates.

mortgage, rates, forecasts