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.
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.
By 2026, the federal funds rate is expected to fall further to 2.9%. Inflation forecasts have also been adjusted upward. Officials now project headline inflation to reach 2.5% by the end of 2025, compared to September's estimate of 2.1%.
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 bottom line. Predicting exactly when mortgage rates will hit 5% is difficult. It could happen by late 2025, but market conditions could speed up or delay this timeline. "Some consumers feel rates will drop in the next two to four months [but] that may never happen," says Rathbun.
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.
and then projects that mortgage interest rates – in particular the 30-year fixed rate, which is closely tied to the federal funds rate and the 10-year Treasury note yield – will remain elevated, and only decline 0.2 percent from 6.5 percent in 2025 to 5.9 percent in 2027.
Last year, the White House projection for bill rates in 2030 was 2.4%. Such a level would be much higher than has been typical since the turn of the century. Three-month bill rates averaged around 1.5% over that period.
Key takeaways. The Federal Reserve is expected to lower rates by at least 100 basis points through the end of 2024. As such, primary mortgage rates could fall by as much as 60 bps over the next year — and by even more if the rates market begins to price in more cuts than are currently expected.
Why mortgage rates won't drop to 2% again. Again, when mortgage rates hit record lows early in the pandemic, the federal funds rate was near zero. Barring another major economic shock, the Fed projects that the federal funds rate will only take modest adjustments downward over the next several years.
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%.
Mortgage rates have tended to fall in response to recent recessions.
CD account interest rates will drop
"As we look ahead into 2025, lower CD interest rates are a possibility," says Ben Alvarado, executive vice president at California Bank and Trust.
At its February 2024 meeting, the Reserve Bank Board decided to leave the cash rate target unchanged at 4.35 per cent. This decision supports progress of inflation to the midpoint of the 2–3 per cent target range within a reasonable timeframe and continued moderate growth in employment.
In fact, total year-on-year CPI and PCE consumer inflation rates could still fall to the Fed's 2% target in 2025, even though they are currently well above target. However, core inflation rates could remain above the Fed's 2% for most or even all of 2025.
Current Forecasts and Expert Opinions
The short answer is: It's highly unlikely we'll see mortgage rates drop back to 3% anytime soon. However, recent inflation numbers point to cooling of the pace of inflation.
The Average US Home Could be Worth $382,000 by 2030
House prices in the US have risen by 48.55% in the last ten years (from $173k to $257k) and if they continue to grow at this rate for another decade, the average US home will be worth $382k by 2030.
Though mortgage rates have fallen from their 8% peaks, the decline has been slow and gradual. Over the past 12 months, the average 30-year fixed mortgage rate has fluctuated between 6.5% and 7.5%. Most housing economists had expected mortgage rates to drop to 6% by the end of 2024, moving into the mid-5% range in 2025.
MBA now expects mortgage rates to range between 6.4% and 6.6% in 2025, while holding steady at 6.3% in 2026. In October, when there was more optimism about the pace of Fed rate cuts, the trade organization projected rates to be between 5.9% and 6.2% in 2025, and at 5.9% in 2026.
More homes on the market in 2025 may create better opportunities for buyers. Higher inventory means fewer bidding wars, which may keep home prices more stable. Falling mortgage rates could also ease the cost of buying a home, though it may take time.
Borrowers are already benefiting from these popular mortgage deals falling in price since last January when the average two-year fixed rate was 5.93%. Now, in 2025, the typical rate for a two-year fix is 5.48%, according to the latest Moneyfacts mortgage report.
These futures can also be short-term or long-term. Short-term interest rate futures have an underlying instrument with a maturity of less than one year, while long-term interest rate futures have an underlying instrument with a maturity of over one year.