Compared to September figures, the updated December FOMC median forecasts of interest rates were raised to 3.9% for the end of 2025 (up from 3.4%), 3.4% for the end of 2026 (up from 2.9%), and 3.1% for the end of 2027 (up from 2.9%).
Looking out into 2025, we believe the most likely path is for the Fed to bring rates down to around 4% in the coming meetings, and then pause, depending on how the inflation and employment data evolves.
Fannie Mae: Rates Will Average 6.4% in 2025 and 6.1% in 2026. The December Housing Forecast from Fannie Mae puts the average 30-year fixed rate at 6.6% in the beginning of 2025, declining to 6.1% in the first quarter of 2026.
The Federal Reserve is projected to lower the federal funds rate (that is, the interest rate that financial institutions charge each other for overnight loans of their monetary reserves) from an estimated 4.6 percent in the fourth quarter of 2024 to 3.4 percent at the end of 2027.
Our forecast that Bank Rate will be cut from 4.75% now to 3.50% in early 2026, which would be further than the low of 4.25% that investors currently expect, explains why we think the average mortgage rate will fall to around 4.0% in 2026.
Despite an overall reduction in borrowing costs over the past two years, the 30-year mortgage rate recently moved up from a little above 6% in September 2024 to closer to 7% in January 2025. That contrasts with longer term mortgage rates holding at historically low levels of between 2% and 3% for much of 2020 and 2021.
Lawrence Yun, chief economist at the National Association of Realtors, even told CNBC in 2023 that he doesn't think mortgage rates will reach the 3% range again in his lifetime.
The 10-year treasury constant maturity rate in the U.S. is forecast to decline by 0.8 percent by 2026, while the 30-year fixed mortgage rate is expected to fall by 1.6 percent. From seven percent in the third quarter of 2023, the average 30-year mortgage rate is projected to reach 5.4 percent in 2026.
The Fed announced another 25bps cut to the federal funds rate in December 2024, marking the third consecutive reduction this year and bringing borrowing costs to the 4.25%-4.5% range, in line with expectations.
"As of January 2025, certificate of deposit (CD) rates have been experiencing a downward trend, influenced by recent Federal Reserve policy decisions. Various projections seem to suggest that rates may go as low as 2.5% by 2026.
Fed officials indicated they now expect to cut rates by just a half point in 2025, which would likely mean two rate cuts at their eight policy-setting meetings. That's down from predicting a full percentage point (or four quarter-point cuts) in their September projections.
Oxford Economics is predicitng that base rate will eventually fall to 2.5 per cent in 2027 where it will broadly remain throughout 2028 and 2029.
Fixed income markets anticipate that the Federal Reserve will cut interest rates in 2025, but not by much. Short-term interest rates are expected to end 2025 close to 4%. That's down from the current 4.25% to 4.5% range as of January 2025. This is after the Fed cut rates in December 2024.
Fannie Mae expects rates to average 6.4% for the year. Wells Fargo projects a slight decline, with rates averaging around 6.3% by the end of the year. Goldman Sachs predicts rates will remain above 6% through 2025.
In fact, in March, Fed Chair Jerome Powell remarked that interest rates "will not go back down to the very low levels that we saw" during the financial crisis, suggesting that the economy can adapt to a more "neutral" benchmark rate range of between 2.4% to 3.8% in the long run, i.e., less tightening, but not too much ...
The lowest average mortgage rates on record came about when the Federal Reserve lowered the federal funds rate in 2020 and 2021 in response to the pandemic. As a result, the weekly average 30-year, fixed-rate mortgage fell to 2.65%, while the average 15-year, fixed-rate mortgage sunk to 2.10%.
Ben Eisen: It's the seller basically transferring their own mortgage to the buyer, and when they do that, the buyer keeps the rate that the seller had, so if it was 3% or 2.5%, they keep that.
Market Experts are Divided on Rate Cuts
It predicts five rate cuts in February, March, May, August, and November, resulting in a base rate of around 3.5%. Bank of America also sees the “terminal rate” of 3.5% by early 2026, which implies five rate cuts from the current level.
Today's rates seem high compared with the recent 2% rates of the pandemic era. But experts say getting below 3% on a 30-year fixed mortgage is unlikely without a severe economic downturn.
Projected Interest Rates in the Next Five Years
ING's interest rate predictions indicate that in 2024, rates will start at 4%, with subsequent cuts to 3.75% in the second quarter, 3.5% in the third, and 3.25% in the final quarter. In 2025, ING predicts a further decline to 3%.
Leading forecasts suggest that by 2026, the average mortgage rate could drop to around 5.0% according to various sources, including the predictions shared by financial analysts on platforms such as Morningstar. They suggest a gradual decline will continue, culminating in rates around 4.5% to 4.25% by 2027.
For instance, he predicted the national average for savings accounts will be 0.35% at the end of 2025, but top-yielding offers could stand at 3.8% by year-end. Top-yielding 1-year CDs could pay about 3.7%, while five-year CDs may pay 3.95% by the end of 2025, McBride forecast.
Interest rate predictions for the next five years depend on factors like inflation, economic growth, and central bank policies. For the next five years, including 2025, analysts forecast interest rates to further adjust, suggesting a stabilisation of around 3.25-4.25% by the end of 2025.