Housing affordability has diminished since mortgage rates began rising in 2022. Inflation strongly influenced the Fed’s decision to raise interest rates consistently, but it also raised housing prices, making homeownership considerably more expensive.
Buyers and sellers have been anxiously waiting for mortgage rates to drop, which has stalled housing growth and created market gridlock.
However, most mortgage rate forecasts have been adjusted to show paltry reductions over the next year, and rates are unlikely to fall below 6% before 2027.
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We spoke with Ralph McLaughlin, former senior economist at Realtor.com and chief economist at OpenBrand, about the state of the housing market and what buyers can expect in the year ahead.
Though market conditions will remain challenging, McLaughlin highlights one bright spot home buyers can count on this year.
A couple celebrates the purchase of a new house. Several years of rising mortgage rates have made homeownership difficult, but a new change may improve housing affordability in 2025.
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Mortgage rates to remain sticky; demand and inventory will recover
Mortgage rates have slowly started declining, reaching 6.85% this week, down from over 7% in January. However, this is still nearly a whole percentage point higher than the levels seen just after the Fed began cutting interest rates in September.
Realtor.com’s 2025 Housing Forecast anticipates modest mortgage rate reductions throughout 2025, reaching around 6.3%. However, Fannie Mae doesn’t expect rates to dip below 6% by 2027, indicating that mortgage rate improvements will be slow-moving over the next few years.
Though mortgage rates won’t change drastically, McLaughlin highlights that inventory and demand may improve overall housing sentiment.
“It looks like 2025 will bring a little bit more life into the housing market than 2024 — and I emphasize a little bit more,” McLaughlin said. “We expect home sales to increase by just about 1.5%, so not much improvement from 2024. However, we expect prices to continue rising by about 3.7% and anticipate new construction picking up a lot.”
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“The unfortunate news is that our forecast for mortgage rates hasn’t improved much from where they are now,” he continued. “We expect rates to average at about 6.3 to 6.5% for the year and to end around the 6.3% mark, so not much improvement on that front.”
“But consumers are still under a lot of pressure. Typically, what we’ve seen in the past when mortgage rates go up is that prices adjust, and you get some built-in affordability. But we haven’t seen that this time around.”
Despite challenging housing conditions, Fannie Mae found that home-buying and selling sentiment is on the upswing. Though mortgage rate optimism remains low, consumers are far more confident in the housing market than in January.
“But there’s still a lot of pent-up demand in the market. We think time will erode some of the lock-in effects of the high mortgage rate environments we’ve seen over the past few years.”
Home buyers will have the highest level of purchasing power seen in years
Due to inventory shortages and increased buyer competition, the housing market has been deemed a ‘seller’s market’ for the past few years. Twenty-one U.S. states will raise their minimum wage levels in 2025, and employers’ salary budgets will increase by 3.7% this year.
Rising salaries and slightly lower mortgage rates may give homebuyers an upper hand in an otherwise challenging housing market.
“The silver lining in all of this is that we expect the buying power of consumers to increase slightly, which will be the first time in many years that home buyers will have felt an increase in buying power,” McLaughlin said.
Related: JP Morgan unveils major 2025 housing market prediction
“Mortgage rates will fall, but most importantly, buyers are going to get help from growing incomes. We expect incomes to grow by about 3.3 to 3.5%,” he explained. “So the combination of slightly lower mortgage rates and higher income will increase buying power.”
Despite relatively high mortgage rates, many buyers feel the tides are changing. More Americans (15%) plan to buy a home this year than in 2024, and Zillow forecasts that existing home sales will increase by over 300,000 year-over-year.
“We also expect inventory to continue to rise in 2025,” McLaughlin said. “We are at the highest inventory levels now that we have been since before the pandemic, and we anticipate inventory increasing by 11.7% or 11.8%.”
“It could be a particularly good time to get into the market because you will have slightly better buying power as your incomes go up and mortgage rates come down, and there will be more inventory on the market. That’s not something that buyers have had over the past several years.”
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