Mortgage rates may be falling, but that doesn’t guarantee that homes will be more affordable in 2025.
The average interest rate on 30-year mortgages fell to 6.2% as of Thursday, down from 7.79% in May. For many buyers, that means they could save hundreds on mortgage payments.
But those savings are bringing buyers back into the market. Existing home sales rose 1.3 percent in July after five months of declines, according to data from the National Association of Realtors. With more buyers competing for a limited number of homes, prices are likely to rise.
Why lower mortgage rates could lead to higher home prices
While lower mortgage rates are helping buyers, the bigger force in the housing market is supply. A long-standing shortage of homes—at least 4 million, according to the NAR’s latest estimate – means that the supply of houses cannot keep up with increasing demand, driving up prices.
“Essentially, affordability temporarily improves with lower interest rates, but competition for scarce housing inventory often cancels out those savings, especially in high-attraction markets known to have limited supply, like New York,” says Maggie Kent, a real estate agent with CORE and sales associate at Eastlight Condominiums in New York.
Existing home sales have been near historic lows for most of the summer as rising mortgage rates both pushed buyers out of the market and discouraged homeowners from selling as many held on to their lower-interest loans.
About 86% of existing mortgages have an interest rate of 6% or less, making it difficult for homeowners to justify moving and taking out a new mortgage with a higher interest rate.
“If mortgage rates fall below 6%, that will likely increase demand for homes, which could drive prices higher,” Kent says next year. She says we could see a “modest” increase in median home prices of 3% or 4%.
As home prices rise, mortgage rates are likely to fall
Industry associations and financial firms predict that mortgage rates will exceed 5% in 2025. While interest rates are most closely aligned with 10-year Treasury yields, they are likely to fall following expected Fed rate cuts that begin this month.
Moderate price increases are also expected for home prices. Here is a selection of the latest forecasts:
Considering that homes currently cost an average of $412,300, price increases of 3% or more could add tens of thousands of dollars to the total cost, potentially eating into the savings from a lower mortgage rate.
However, it is important to note that housing shortages affect each real estate market differently, and this could affect whether prices rise or fall next year.
“The housing shortage depends a lot on location,” says Alex Shekhtman, CEO and founder of LBC Mortgage. “In Texas, for example, we’re not going to see the same kind of shortage as in Los Angeles. Every market has its own dynamics.”
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