The National Association of Realtors (NAR) predicts the average rate for the 30-year fixed-rate mortgage in the US will hover around 6.0% in 2025. This projection suggests a potential revitalization of the housing market, stimulating both new construction and demand for existing homes. NAR anticipates 4.5 million existing home sales in 2025, accompanied by a modest 2% increase in house prices, with a median existing home price estimated at $410,700.
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6% Mortgage Rates: A Catalyst for Affordability
According to NAR, a stabilization of mortgage rates around 6% would significantly expand housing affordability. This rate would enable approximately 6.2 million households to afford median-priced homes, a stark contrast to the current market where rates near 7% have restricted affordability for many potential buyers. The previous period of aggressive monetary policy tightening by the Federal Reserve, from March 2022 to July 2023, significantly impacted the housing market. Higher mortgage rates discouraged existing homeowners from selling, leading to a sharp contraction in sales of previously owned homes and exacerbating a supply shortage.
Impact of Low Existing Mortgage Rates and New Construction Trends
A significant portion of existing homeowners hold mortgage rates below 5%. This “rate-lock” effect further constrained the supply of homes for sale, contributing to rising home prices and excluding many potential buyers from the market. In response to this dynamic, builders shifted towards constructing smaller homes, attracting buyers to new construction and driving an increase in new home sales. This shift in the market highlights the complex interplay between mortgage rates, supply, and demand in the housing sector. The graphic below illustrates the recent trend in new home sales.
Interest Rate Cuts and Market Dynamics
Despite the Federal Reserve’s recent interest rate cuts, the 30-year fixed-rate mortgage remains near 7%. This persistence is largely attributed to the yield on the 10-year U.S. Treasury note, which has been influenced by the sustained resilience of the US economy and concerns about potential inflationary pressures from future economic policies. These macroeconomic factors continue to exert a strong influence on mortgage rates.
Housing Starts and Inventory Challenges
NAR forecasts 1.45 million housing starts in the coming year, predominantly for single-family units. Lower mortgage rates are expected to significantly benefit homebuilders by reducing financing costs and bolstering market confidence. However, inventory levels are still projected to remain below pre-pandemic norms, posing ongoing challenges for buyers. The chart below illustrates the historical trend of housing starts.
Conclusion: A Cautious Outlook for Recovery
The NAR’s projections suggest that a moderation in mortgage rates to around 6% could significantly improve housing affordability and stimulate demand. While lower rates are expected to boost new construction and encourage existing homeowners to sell, persistent inventory challenges may continue to constrain the market’s full recovery. The interplay between mortgage rates, inventory levels, and broader economic conditions will be crucial in determining the future trajectory of the US housing market.
