When the Fed began cutting interest rates in September, and mortgage rates hovered just above 6%, plenty of people hoped 2025 would bring mortgage rates closer to 5% by the end of the year. Consumers, for one, were hopeful that lower mortgage rates would reignite activity, shifting the advantage towards a seller’s market.
However, months of increased inflation and political uncertainty from the 2024 presidential election have created upward pressure on mortgage rates and dampened homebuyer activity.
The year ahead may look different than anticipated, but homebuyer optimism may continue throughout 2025.
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Housing experts predict several trends will emerge in 2025, including wage growth, moderating home price growth, and modestly declining mortgage rates, fueling consumer optimism in the housing market.
So, while the market may still be challenging for buyers to navigate, consumer perception about conditions is improving, and that may be enough to undo the standoff between sellers and buyers.
A family is shown looking at their new home. Inflation, housing prices, and mortgage rates strongly influence consumer confidence and housing market activity.
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Homebuyers more optimistic about mortgage rates
Though the December housing market was sluggish, consumers feel significantly more optimistic about mortgage rates than they did a year ago.
The Fannie Mae Home Purchase Sentiment Index found that most consumers expect mortgage rates to decline over the next twelve months. Although sentiment dipped slightly between November and December 2024, it shows a substantial improvement year over year.
Still, only about 20% of consumers think it’s a good time to buy a home, showing split sentiment toward current housing market conditions.
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Mark Palim, Fannie Mae’s Chief Economist, explains that housing optimism is a combination of easing conditions and consumers getting used to a challenging market.
“Even though the HPSI fell to end the year, consumer sentiment toward the housing market finished 2024 substantially above year-ago levels, partly attributable to respondents’ ongoing expectations that mortgage rates will decline,” he said.
“While respondents remain discouraged by the pandemic-era run-up in home prices and mortgage rates, the upward trend in home buying sentiment in 2024 may reflect a slow acclimatization to the generally less-affordable market conditions.”
Improved home-buying sentiment is likely created by the notion that the housing market couldn’t get worse, so improvements must be on the horizon. However, whether the market improves, stays stagnant or worsens remains to be seen.
Real estate professionals anxious about 2025 housing market downturn
Inflation is among the strongest determinants of interest rate levels and consumer confidence. When inflation is high, the Fed raises or maintains high interest rates to discourage spending by increasing the cost of borrowing.
Though inflation had been cooling for most of 2024, it rose steadily during the Q4, reaching 2.9% in December. The numbers have been straying further from the Fed’s 2% target inflation rate, prompting experts to predict fewer interest rate cuts in 2025.
Related: Dave Ramsey reveals major 2025 mortgage rate prediction
The federal funds rate isn’t directly tied to mortgage rates, but sustained interest rates and increased inflation may hinder consumer confidence and home-buying activity. There are also concerns about whether the incoming presidential administration’s trade tariffs or immigration policies could increase inflation and housing costs, discouraging home-buying activity.
Nearly a third of real estate professionals believe that proposed Trump policies will create instability and impede housing market growth. 61% believe building materials will increase, driving up the cost of building new homes.
Proposed housing policy, inflation, the Fed’s fiscal policy, and mortgage rate will be the top determinants of the 2025 housing market. If mortgage rates inch toward 6% as expected, it may boost buying activity and prompt more sellers to put their homes on the market.
However, realtors’ housing concerns may become a reality if inflation and mortgage rates continue rising.
Related: Veteran fund manager issues stark S&P 500 warning for 2025
