The National Association of Home Builders expects the 30-year mortgage rate to decrease to around 6.5% by the end of 2024 and fall below 6% by the end of 2025, according to the group's latest outlook.
It's possible that rates will one day go back down to 3%, though if current trends hold that's not likely to happen anytime soon.
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.
However, interest rates predictions are difficult as any further cuts depend on factors such as what happens with inflation. So predictions will have to be revised. For example, in January 2024, Capital Economics forecast that interest rates would be reduced to 4.00% by the end of 2024.
The fed funds target rate is now set at 4.25% to 4.50%. The Fed held rates at 5.25% to 5.50% from July 2023 to September 2024. Between March 2022 and July 2023, the Fed raised rates eleven times, from near 0%. Source: U.S. Federal Reserve, December 18, 2024.
As a result, we expect the Bank to cut interest rates from 4.75% now to 3.50% in early 2026, further than the low of 4.00% that investors currently expect.
Fannie Mae's chief economist says, “Long-run interest rates have moved upward over the past couple of months following a string of continued strong economic data and disappointing inflation readings.” They are putting the average 30-year fixed rate at 6.5% in the beginning of 2025, declining to 6.1% in 2026.
Against this backdrop, the MPC decided to reduce the policy rate by 25 basis points, to 7.75%, with effect from 22 November 2024. The decision was unanimous.
Keeping Rates Around 4%
According to BlackRock's analysts , in 2025, the Fed will likely reduce rates further to around 4% and then pause, depending on inflation and labor market data.
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.
There's Still a Way to Snag a 3% Mortgage Rate. Assumable mortgages are rare but allow buyers to take over a seller's existing debt, offering an avenue to secure lower borrowing costs.
By the end of 2025, McBride predicts that the average 30-year fixed-rate mortgage will fall 0.54 percentage point from its year-end 2024 level (7.04%).
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.
Which bank gives the highest interest rate on FD? As of 2024, Canara Bank offers the highest interest rate of 7.25% for 444 days.
Therefore, prospective borrowers should anticipate mortgage rates in the low to mid-6% range through the end of 2024." Still, even a small rate reduction can make a big impact due to the large size of most mortgages and the long repayment timeline.
For only the third time in 2024, the Federal Reserve has lowered the federal funds rate. On Dec. 18, the Fed cut the rate, which influences interest on everything from car loans to credit cards, by 25 basis points. That takes it from 4.50% to 4.75% to 4.25% to 4.50%, the lowest it's been since February 2023.
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.
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.
Mortgage points, also called discount points, lower your interest rate for the life of the mortgage. A lender may allow borrowers to purchase as little as a fraction of a point or up to four points. One mortgage point typically costs 1% of your loan and permanently lowers your interest rate by about 0.25%.
National Association of Home Builders (NAHB): The construction trade group sees rates for 30-year fixed mortgages averaging 5.94% in 2025 and 5.69% in 2026. Fannie Mae: As one of the prominent backers of conventional mortgages, Fannie Mae has to keep its finger on the pulse of the housing market.
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.
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.