HousingWire’s 2025 mortgage rate forecast
I like to say that I don’t predict mortgage rates – and I’m not convinced anyone can. Bond markets are driven by so many unpredictable factors that even the wisest market visionaries have major blind spots. Look no further than a year ago when the prospect of a recession in the US seemed inevitable and mortgage rates were expected to fall into the 5s for most of 2024. None of that happened. Predicting mortgage interest rates is difficult.
That said, we do have some insight as to what is likely what will happen to mortgage interest rates in the coming year. And since mortgage rates drive a large portion of the U.S. housing market, I thought I’d round up the best ideas here. We recently published the HousingWire Housing Market 2025 Forecast. In it we discuss our expectations for house sales and house prices in the coming year and the assumptions about mortgage interest rates that underlie this forecast. These are the assumptions from that study.
The interest rate for the 30-year fixed-rate mortgage has remained the same longer higher than anyone expected three years ago. At the beginning of 2024, it was generally expected that mortgage rates would fall over the course of the year. But in fact, interest rates were closer to 7% for most of the year, peaking in May and again in November, where we are now.
The HousingWire mortgage rate forecast for 2025
HousingWire expects the 30-year fixed rate mortgage to spend most of the 2025 calendar year in a range of 5.75% – 7.25%.
A bandwidth of 150 basis points per year is quite wide, but over the past three years the mortgage interest rate has moved within a bandwidth of 140 basis points (2024), 200 basis points (2023) and no less than 400 basis points in 2022. See the graph below for the distribution of mortgage interest rates over the past thirteen years. In light of recent market trends, a range of 150 basis points in 2025 seems plausible. When rates were low, the reach was much smaller.
HousingWire’s chief analyst Logan Mohtashami highlights several macroeconomic variables that contribute to the mortgage rate range in the coming year: economic growth, inflation, unemployment and the possibility of an outright recession.
A big miss for forecasters in 2024 was that many assumed a recession was imminent. The headlines and conventional wisdom saw a recession starting around the corner in late 2021 and by the end of 2023, many were certain the recession was coming. But the US economy defied expectations and continued to grow. As a result, mortgage interest rates also remained surprisingly high.
In contrast to the impact of recession expectations on interest rates is the power of inflation. In 2024, the prospect of inflation forced the Federal Reserve to keep short-term interest rates high for longer. Finally, the Fed began its easing cycle in September. Around the same time, markets began anticipating a Trump victory and broadly view Trump’s economic plans as inflationary. As a result, 10-year Treasury yields began rising even as the Fed began cutting spending.
Logan likes to point out that the Fed is still not “accommodative,” meaning the Fed is focused more on curbing inflation than cutting rates to stimulate economic growth and accelerate hiring. The Fed’s ‘switch’ from restrictive to accommodative has not yet occurred.
HousingWire’s Flavian Nunes points out how sensitive, even if indirectly, mortgage rates have been to Federal Reserve policy.
The 10-year-old and the spread
Mortgage interest rates are loosely linked to the interest rate on ten-year government bonds. For 2025, we expect the return over a ten-year period to be between 3.4% and 4.50%. Logan points out that in the absence of economic data indicating a recession is on the horizon, 10-year yields are unlikely to go lower than 3.40%. If the economy continues to outperform expectations, interest rates could rise above 4.5%.
Mortgage rates trade at a premium to the yield on 10-year government bonds. The premium is known as ‘the spread’. As interest rates fell to record lows during the pandemic, spreads also fell to record lows. When rates rose dramatically in 2022, that volatility forced investors to demand higher interest rates on mortgage bonds, widening the spread. Over the past three years, the underlying interest rate has risen and the spread has also increased. The mortgage interest paid by home buyers suffered a double blow.
Now that interest rates have stabilized, the difference will have narrowed further in 2024, from 291 basis points a year ago to 238 basis points today. We expect that stability in the underlying bond markets will allow mortgage spreads to narrow slightly further in 2025. If the 10-year rate falls to the lower end of the expected range over the course of the year, say 3.5%, and the spread narrows to 225 basis points, these moments would indicate that mortgages are available at 5.75%.
A slowly narrowing spread gives us some optimism that mortgage rates will reach the lower end of our forecast range for this year.
Unfortunately for homebuyers in the US housing market, it seems unlikely that the growing US economy, the bond market and spreads will conspire to create a scenario where mortgage rates fall far enough to alleviate the affordability problems faced by so many over the past three years have had. .
Read the full HousingWire housing market forecast for 2025.
