Mortgage rates have been rising for the past few years and haven’t dipped below 6% since September 2022. While many hoped the tide would turn once the Fed started cutting interest rates, recent increases may indicate a bleak housing outlook.
Potential buyers are hesitant to enter the housing market with high interest rates, and sellers locked into favorable mortgage rates hold onto their homes until rates ease.
Many Americans eager to buy a home find themselves trapped in a standoff between mortgage rates, housing supply, and heightened prices.
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Though policy initiatives have been proposed to help ease pressures from the housing crisis and reduce financial strain on consumers, it may take years for the impacts to reach the market directly.
Most housing experts note that the key to unlocking the housing market bottleneck is for mortgage rates to come down, motivating both buyers and sellers.
However, with the majority of Americans locked into sub-4% rates, mortgage rates may have to drop several percentage points to spark significant change within the market.
A young family is seen in their new home. Lack of affordability, increased competition, and elevated mortgage rates have made it difficult for first-time buyers to close on a home.
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Americans locked into low mortgage rates are hesitant to sell
When mortgage rates started climbing in 2022, many sellers backed off plans to put their homes on the market.
Excluding older sellers approaching retirement and looking to downsize into an apartment, most Americans have to take on a new mortgage once they move after their home sells. Sellers eventually become buyers, meaning that skyrocketing mortgage rates are top of mind for everyone in the market.
Last week, 30-year fixed mortgage rates climbed to 6.93%, closing in on 7% after dropping to nearly 6% in September. This course reversal is worrisome for first-time buyers and prompts would-be sellers to hold onto their homes a bit longer.
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Realtor.com found that over 20% of all mortgages have interest rates below 3%, and 55% carry an interest rate of 4% or lower.
Since the majority of Americans have mortgage rates far lower than the current level, experts note that home buying and selling are also centered around major life events — marriage, starting a family, divorce, and retirement — which ultimately fuels the market despite high rates.
40% of consumers would buy a home if mortgage rates fell below 6%, a positive indicator for the housing market over the next few years.
Mortgage rates are projected to ease toward 6% by the end of 2025, which should be low enough to spark buyer and seller interest.
Housing supply is increasing, but it isn’t enough to offset competition
Housing inventory levels reached an all-time low in February 2022, which coincides with the beginning of rising mortgage rates.
Though inventory has increased substantially — reaching to nearly 900,000 active listings in December 2024 — it still hasn’t recovered to pre-COVID levels.
Related: Fed chair Jerome Powell issues warning on inflation, weak housing market
The National Association of Home Builders notes that the key factors dampening housing construction and affordability are the lack of land lots, higher building costs, and a continued shortage of construction workers.
NAHB Chief Economist Robert Dietz highlights that federal regulations prevent large-scale construction projects in densely populated cities and keep inventory growth sluggish.
“Policymakers at all levels of government need to eliminate excessive regulations, ease permitting roadblocks, and promote careers in the skilled trades to allow builders to construct more homes and apartments across the nation,” he said.
A renewed housing market will depend on how mortgage rates change over the next few years and if construction projects increase in areas with high buyer demand.
Related: Veteran fund manager issues dire S&P 500 warning for 2025
